<PAGE> 1
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. 2)
FILED BY THE REGISTRANT [X] FILED BY A PARTY OTHER THAN THE REGISTRANT [ ]
- --------------------------------------------------------------------------------
Check the appropriate box:
[ ] Preliminary Proxy Statement
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to sec.240.14a-11(c) or sec.240.14a-12
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
IPL Systems, Inc.
(Name of Registrant as Specified In Its Charter)
[ ]
(Name of Person(s) Filing Proxy Statement)
PAYMENT OF FILING FEE (CHECK THE APPROPRIATE BOX):
[ ] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
2) Aggregate number of securities to which transaction applies:
3) Per unit price or other underlying value of transaction computed pursuant
to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee is
calculated and state how it was determined):
4) Proposed maximum aggregate value of transaction:
5) Total fee paid:
[X] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
2) Form, Schedule or Registration Statement No.:
3) Filing Party:
4) Date Filed:
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<PAGE> 2
[IPL Systems Logo]
IPL SYSTEMS, INC.
124 ACTON STREET
MAYNARD, MASSACHUSETTS 01745
(508) 461-1000
May 6, 1997
Dear Stockholder:
You are cordially invited to attend the annual meeting of stockholders of
IPL Systems, Inc. ("IPL") to be held at 10:00 a.m. on May 29, 1997 at the
offices of IPL at the address set forth above.
At this meeting, stockholders will vote on certain matters relating to an
Agreement and Plan of Merger and Reorganization, dated as of February 28, 1997
(the "Merger Agreement") among IPL, IPL Acquisition Corp. ("Merger Sub"), a
wholly-owned subsidiary of IPL, ANDATACO ("ANDATACO"), a California corporation,
and the principal shareholder of ANDATACO. The Merger Agreement provides for the
merger (the "Merger") of Merger Sub with and into ANDATACO, with ANDATACO being
the surviving corporation. Specifically, you will be asked to amend IPL's
Articles of Organization to increase the number of authorized shares of Class A
Common Stock, $0.01 par value per share ("IPL Stock"), from 20,000,000 to
30,000,000, and to issue the number of such shares required pursuant to the
terms of the Merger Agreement (the "Merger Proposals"). The merger would result
in one of the two current shareholders of ANDATACO owning a controlling interest
in IPL. The IPL Board of Directors believes that the Merger would allow IPL to
realize certain cost savings, to further penetrate the rapidly expanding open
architecture storage market and to have enhanced access to additional working
capital. Information about IPL and ANDATACO and details about the proposed
Merger are included in the attached Proxy Statement.
A special committee of independent directors of IPL carefully reviewed and
considered the terms and conditions of the Merger and, believing the Merger to
be in the best interests of IPL and its stockholders, unanimously recommended to
the IPL Board of Directors that the Merger Agreement be approved. In evaluating
the Merger, the IPL Board of Directors considered a number of factors, including
the recommendation of the special committee and an opinion from the Board's
financial advisor, Needham & Company, Inc., that the consideration to be paid in
the Merger to ANDATACO shareholders is fair to IPL stockholders from a financial
point of view. See "THE MERGER PROPOSALS -- The Merger -- Fairness Opinion" in
the attached Proxy Statement.
THE IPL BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT
AND UNANIMOUSLY RECOMMENDS THAT YOU VOTE IN FAVOR OF THE MERGER PROPOSALS. IN
CONSIDERING THIS RECOMMENDATION, YOU SHOULD REVIEW CAREFULLY ALL THE INFORMATION
CONTAINED IN THE ATTACHED PROXY STATEMENT.
At the meeting you will also be asked to fix the number of directors at
four and to elect IPL's Board of Directors.
Additionally, stockholders will vote on proposed amendments to the IPL
Systems, Inc. 1996 Consolidated Equity Incentive Plan (the "Equity Plan") to
increase the number of shares of IPL Stock covered by the Equity Plan from
650,000 to 2,500,000 and to increase the number that may be issued to any
participant from 250,000 to 1,000,000.
For reasons of economy we have decided this year to use our 1996 Annual
Report on Form 10-K as our 1996 annual report to stockholders. The 1996 annual
report to stockholders is included as Annex III to the attached proxy statement
and largely conforms to the 1996 Form 10-K, with certain sections omitted
because they are included elsewhere in the proxy statement and annexes.
<PAGE> 3
YOUR VOTE IS EXTREMELY IMPORTANT.
We appreciate the loyalty and support our stockholders have provided. We
hope that you will continue this support by voting FOR the Merger Proposals, the
management nominees and the amendment to the Equity Plan. It is important that
your shares be represented and voted at the meeting regardless of the size of
your holdings. ACCORDINGLY, WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING,
PLEASE COMPLETE, SIGN, DATE AND RETURN THE ACCOMPANYING PROXY CARD IN THE
ENCLOSED ENVELOPE IN ORDER TO MAKE CERTAIN THAT YOUR SHARES WILL BE REPRESENTED
AT THE MEETING. IF YOU SUBSEQUENTLY DECIDE TO ATTEND THE MEETING AND VOTE IN
PERSON, YOUR PROXY WILL NOT BE USED.
Sincerely,
RONALD J. GELLERT
President and Chief Executive Officer
<PAGE> 4
[IPL Systems Logo]
IPL SYSTEMS, INC.
124 ACTON STREET
MAYNARD, MASSACHUSETTS 01754
(508) 461-1000
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 29, 1997
Notice is hereby given that the annual meeting of stockholders of IPL
Systems, Inc. ("IPL"), a Massachusetts corporation, will be held on May 29,
1997, at 10:00 a.m., at the offices of IPL, 124 Acton Street, Maynard,
Massachusetts, for the following purposes:
(1) To fix the number of directors at four.
(2) To elect the following nominees as directors: Ronald J. Gellert,
Stephen J. Ippolito, Cornelius P. McMullan and Harris Ravine.
(3) To consider and vote upon a proposal (i) to amend IPL's Articles
of Organization to authorize an increase in the Class A Common Stock, $0.01
par value per share ("IPL Stock"), from 20,000,000 shares to 30,000,000
shares and (ii) to approve the issuance of the number of shares of IPL
Stock required pursuant to the terms of the Agreement and Plan of Merger
and Reorganization, dated as of February 28, 1997, among IPL, IPL
Acquisition Corp. ("Merger Sub"), a wholly-owned subsidiary of IPL,
ANDATACO ("ANDATACO"), a California corporation, and the principal
shareholder of ANDATACO, which provides for the merger (the "Merger") of
Merger Sub with and into ANDATACO.
(4) To consider and vote upon proposed amendments to the IPL Systems,
Inc. 1996 Consolidated Equity Incentive Plan that would increase the number
of shares of IPL Stock covered by such plan from 650,000 to 2,500,000 and
increase the number of shares that may be issued to any one participant
from 250,000 to 1,000,000.
(5) To transact such other business as may be in furtherance of or
incidental to the foregoing.
The business referred to above may be transacted at the meeting or any
adjournment or postponement thereof. The IPL Board of Directors has fixed the
close of business on April 14, 1997 as the record date for determining the
stockholders entitled to notice of and to vote at the meeting and any
adjournment or postponement thereof; only stockholders of record at the close of
business on that date will be entitled to attend the meeting and vote.
UNDER MASSACHUSETTS LAW, STOCKHOLDERS OF IPL DO NOT HAVE ANY RIGHTS OF
APPRAISAL IN CONNECTION WITH THE MERGER DESCRIBED IN THE ACCOMPANYING PROXY
STATEMENT.
IT IS IMPORTANT THAT YOUR SHARES BE REPRESENTED AT THE MEETING. WHETHER OR
NOT YOU PLAN TO ATTEND THE MEETING, PLEASE COMPLETE YOUR PROXY AND RETURN IT IN
THE ENCLOSED ENVELOPE, WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES.
IF YOU ATTEND THE MEETING AND WISH TO VOTE IN PERSON, YOUR PROXY WILL NOT BE
USED.
BY ORDER OF THE BOARD OF DIRECTORS
NATHANIEL S. GARDINER
Clerk
Dated: May 6, 1997
<PAGE> 5
[IPL Systems Logo]
IPL SYSTEMS, INC.
124 ACTON STREET
MAYNARD, MASSACHUSETTS 01754
(508) 461-1000
PROXY STATEMENT
FOR ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 29, 1997
The enclosed proxy is solicited from the holders of the Class A Common
Stock, $0.01 par value per share (the "IPL Stock"), of IPL Systems, Inc. ("IPL")
on behalf of the Board of Directors of IPL (the "IPL Board") for use at the
annual meeting of stockholders to be held on May 29, 1997 and any adjournment or
postponement thereof (the "Meeting"). Only IPL stockholders of record at the
close of business on April 14, 1997 (the "Record Date") are entitled to vote at
the Meeting.
This Proxy Statement (this "Proxy Statement") relates to (i) fixing the
number of directors at four, (ii) the election of the IPL Board, (iii) the
proposed merger (the "Merger") of IPL Acquisition Corp. ("Merger Sub"), a
Delaware corporation and a wholly-owned subsidiary of IPL, with and into
ANDATACO ("ANDATACO"), a California corporation, pursuant to the terms of an
Agreement and Plan of Merger and Reorganization (the "Merger Agreement"), dated
as of February 28, 1997, among IPL, IPL Acquisition Corp., Merger Sub, ANDATACO
and W. David Sykes, the controlling shareholder of ANDATACO and (iv) a proposed
increase in the number of shares of IPL Stock covered by, or issuable to any one
participant under, the IPL Systems, Inc. 1996 Consolidated Equity Incentive Plan
(the "Equity Plan"). In order for the Merger to be consummated, IPL stockholders
need to approve (i) an amendment to IPL's Articles of Organization increasing
the number of authorized shares of IPL Stock from 20,000,000 to 30,000,000 and
(ii) the issuance of shares of IPL Stock required pursuant to the terms of the
Merger Agreement (the "Merger Proposals"). The Merger would result in former
holders of ANDATACO equity (including options, warrants and other rights to
acquire ANDATACO Common Stock, $1.00 par value per share ("ANDATACO Stock"))
owning 74.8% of the post-merger outstanding IPL Stock on a fully diluted basis,
with majority control vested in a single individual, Mr. Sykes. This percentage
could increase or decrease, however, if the indemnification provisions under the
Merger Agreement are exercised by IPL or the ANDATACO shareholders after the
closing.
The approximate date on which this Proxy Statement and the accompanying
form of proxy will first be sent or given to security holders is May 6, 1997.
If the Merger Proposals are approved and the other conditions set forth in
the Merger Agreement are satisfied, Merger Sub will be merged with and into
ANDATACO, with the result that the separate corporate existence of Merger Sub
will cease, and ANDATACO will become a wholly-owned subsidiary of IPL. The IPL
Stock to be issued to holders of ANDATACO equity in connection with the Merger
is referred to herein as the "Merger Consideration" or the "Merger Shares."
On the Record Date, IPL had outstanding 5,633,819 shares of IPL Stock,
which is its only outstanding class of capital stock. Each outstanding share of
IPL Stock is entitled to one vote for each matter submitted to a vote at the
Meeting. A majority in interest of the shares of IPL Stock outstanding as of the
Record Date, represented at the Meeting in person or by proxy, will constitute a
quorum for the transaction of business. Directors will be elected by a plurality
of the votes properly cast at the Meeting. Abstentions, votes withheld
<PAGE> 6
and broker non-votes will not be treated as votes cast for this purpose. The
affirmative vote of a majority of the shares of IPL Stock outstanding as of the
Record Date is required to adopt the Merger Proposals. Abstentions and broker
non-votes will have the effect, together with any other shares not voted at the
Meeting, of votes against adoption of the Merger Proposals. The affirmative vote
by the holders of a majority of the shares of IPL Stock present, or represented,
and entitled to vote at the Meeting is required to approve the amendments to the
Equity Plan; broker non-votes will not be counted as present or represented for
this purpose, but abstentions will be counted as present and entitled to vote
and, accordingly, will have the effect of negative votes.
The authority granted by an executed proxy may be revoked at any time
before its effective exercise by filing with the Clerk of IPL a written
revocation or a duly executed proxy bearing a later date or by voting in person
at the Meeting. Shares represented by executed and unrevoked proxies will be
voted and, where a choice has been specified with respect to any matter to be
acted upon, the shares will be voted in accordance with the specification so
made. If no choice has been specified on the proxy, the shares will be voted to
elect the directors nominated by IPL's management, for the amendments to the
Equity Plan and in favor of the Merger Proposals.
Certain statements in this Proxy Statement are forward-looking and are
identified by the use of forward-looking words such as "intended," "expects,"
"expected," "anticipates" and "anticipated." These forward-looking statements
are based on the current expectations of IPL or ANDATACO. Because forward-
looking statements involve risks and uncertainties, actual events could differ
materially. In addition to the factors discussed in this Proxy Statement, among
the factors that could cause events to differ materially from current
expectations are: (i) the general economic and competitive conditions in markets
and countries where IPL and ANDATACO offer products and services; (ii) changes
in capital availability or costs; (iii) fluctuations in demand for certain of
the products and services offered by the companies; (iv) technological
challenges associated with the development and manufacture of current and
anticipated products and services; (v) commercial acceptance of such products
and services and competitive pressure from other products and services; and (vi)
difficulties encountered in integrating the operations of the two companies. See
also Exhibit 99.1 to IPL's Amendment No. 1 to and Restatement of its Annual
Report on Form 10-K/A for the fiscal year ended December 31, 1996 for additional
risk factors regarding IPL.
Information regarding the business of ANDATACO, as well as all financial
information and ANDATACO's management's discussion and analysis of financial
condition and results of operations, has been supplied by ANDATACO, which has
represented and warranted the accuracy thereof to IPL pursuant to the Merger
Agreement.
DEC Alpha is a trademark of Digital Equipment Corporation.
RS/6000 and AS/400 are trademarks of International Business Machines
Corporation.
NetWare is a trademark of Novell, Inc.
Windows NT is a trademark of Microsoft Corporation.
<PAGE> 7
TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C>
PROXY STATEMENT SUMMARY............................................................... 1
The Meeting......................................................................... 1
The Merger.......................................................................... 1
IPL SELECTED FINANCIAL DATA........................................................... 6
ANDATACO SELECTED FINANCIAL DATA...................................................... 7
UNAUDITED PRO FORMA SELECTED FINANCIAL INFORMATION.................................... 8
COMPARATIVE PER SHARE FINANCIAL INFORMATION........................................... 9
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS..................................... 10
THE MEETING........................................................................... 15
Record Date; Outstanding Securities................................................. 15
Purpose of the Meeting.............................................................. 15
Required Vote....................................................................... 15
Voting of Proxies................................................................... 15
Expenses of Solicitation............................................................ 16
Selection of Auditors............................................................... 16
Miscellaneous....................................................................... 16
Further Information................................................................. 16
THE MERGER PROPOSALS.................................................................. 17
The Merger.......................................................................... 17
The Merger Agreement................................................................ 24
CERTAIN OTHER MATTERS RELATING TO THE MERGER.......................................... 28
Certain Federal Income Tax Consequences............................................. 28
Management of IPL After the Merger.................................................. 28
Resales of Merger Consideration; Sykes Lock-up Agreement............................ 29
Noncompetition Agreement............................................................ 29
Employment Agreements............................................................... 29
Listing............................................................................. 30
Regulatory Matters.................................................................. 31
Accounting Treatment................................................................ 31
OEM Agreement....................................................................... 31
Imperial Bank Credit Agreement...................................................... 31
Description of IPL Stock............................................................ 32
Financial Advisors.................................................................. 32
DESCRIPTION OF IPL.................................................................... 32
IPL MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.......................................................................... 32
DESCRIPTION OF ANDATACO............................................................... 32
General............................................................................. 32
Business............................................................................ 32
Properties.......................................................................... 33
Employees........................................................................... 34
Legal Matters....................................................................... 34
</TABLE>
i
<PAGE> 8
<TABLE>
<CAPTION>
PAGE
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<S> <C>
ANDATACO MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.......................................................................... 35
Overview............................................................................ 35
Results of Operations............................................................... 35
Income Taxes........................................................................ 36
Liquidity and Capital Resources..................................................... 36
ELECTION OF DIRECTORS................................................................. 36
Directors........................................................................... 36
Board Meetings and Committees....................................................... 37
Director Compensation............................................................... 38
Consulting Agreements with Directors................................................ 38
EXECUTIVE OFFICERS.................................................................... 38
EXECUTIVE COMPENSATION................................................................ 40
Compensation Committee Report on Executive Compensation............................. 41
Executive Compensation Policies..................................................... 41
Compensation of Chief Executive Officer............................................. 42
Executive Compensation Tables....................................................... 43
Executive Severance and Employment Agreements....................................... 44
Compensation Committee Interlocks and Insider Participation......................... 45
Certain Transactions................................................................ 45
PROPOSAL TO AMEND THE EQUITY PLAN..................................................... 46
General............................................................................. 46
Administration and Eligibility...................................................... 46
Purchase Terms and Price............................................................ 47
Federal Income Tax Consequences Relating to Stock Options........................... 47
Vote Required....................................................................... 48
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934.................. 48
IPL SHARE OWNERSHIP................................................................... 48
INDEPENDENT ACCOUNTANTS............................................................... 49
STOCKHOLDER PROPOSALS................................................................. 49
INDEX TO FINANCIAL STATEMENTS......................................................... F-1
Annex I Agreement and Plan of Merger and Reorganization
Annex II Opinion of Needham & Company, Inc.
Annex III IPL's 1996 Annual Report to Stockholders
Annex IV IPL 1996 Consolidated Equity Incentive Plan
</TABLE>
ii
<PAGE> 9
PROXY STATEMENT SUMMARY
The following is a summary of certain information contained elsewhere in
this Proxy Statement. Reference is made to, and this summary is qualified in its
entirety by, the more detailed information contained in this Proxy Statement and
the annexes attached hereto. Unless otherwise defined herein, capitalized terms
used in this summary have the respective meanings ascribed to them elsewhere in
this Proxy Statement. You are urged to read this Proxy Statement and the other
documents attached hereto or delivered herewith in their entirety.
THE MEETING
General. This Proxy Statement and enclosed proxy are being furnished in
connection with the solicitation by the IPL Board of proxies for use at the
Meeting. The purpose of the Meeting is to fix the number of directors at four,
to elect a Board of Directors of IPL, to consider and vote upon proposals
relating to the Merger described herein, and to amend the IPL Equity Plan.
Adoption of the Merger Proposals is a condition to consummation of the Merger.
Record Date; Vote Required. Only holders of record of shares of IPL Stock
at the close of business on April 14, 1997 (the "Record Date") are entitled to
notice of and to vote at the Meeting. At the Record Date, there were 5,633,819
shares of IPL Stock outstanding and entitled to vote.
As of the Record Date, directors and executive officers of IPL and their
affiliates owned beneficially an aggregate of 891,412 of the outstanding shares
of IPL Stock or approximately 15.8% of the shares outstanding and entitled to
vote on such date. The holders of these shares have agreed to vote them in favor
of the Merger Proposals.
The presence in person, or by properly executed proxy, of holders of a
majority of the shares of IPL Stock outstanding as of the Record Date will
constitute a quorum at the Meeting. A plurality of the shares represented at the
Meeting will elect the directors; the affirmative vote of a majority of the
shares of IPL Stock outstanding as of the Record Date is required to approve the
Merger Proposals; and the affirmative vote of a majority in interest of the IPL
Stock present, or represented, and entitled to vote at the Meeting is required
to approve the proposed amendments to the Equity Plan. Abstentions and broker
non-votes will be counted toward a quorum, but they will not be voted for or
against the approval and adoption of the proposals and, therefore, will have the
effect of negative votes with regard to the Merger Proposals. With respect to
the vote concerning the Equity Plan, broker non-votes will not be counted as
present or represented; abstentions, on the other hand, will be counted as
present and entitled to vote and, accordingly, will have the effect of negative
votes.
THE MERGER
General. The Merger Agreement provides for the merger of Merger Sub, a
newly formed, wholly-owned subsidiary of IPL, with and into ANDATACO, with
ANDATACO being the surviving corporation and becoming a wholly-owned subsidiary
of IPL. The Merger Agreement also provides that, in the Merger, ANDATACO equity
holders will receive shares (or the right to acquire shares) of IPL Stock equal
to 74.8% of the post-merger outstanding capital stock of IPL on a fully diluted
basis. As a result, if the Merger is consummated, the two current shareholders
of ANDATACO will control IPL following the Merger. Under the Massachusetts
Business Corporation Law (the "MBCL"), no appraisal rights are available in
connection with the Merger.
Consummation of the Merger could adversely affect IPL stockholders. First,
each current stockholder's ownership interest will be substantially decreased.
If the Merger is consummated, the 5,633,819 shares of IPL Stock which are
currently outstanding and represent 100% of the shares outstanding of IPL will
represent approximately 23.6% of the outstanding shares of IPL immediately after
the Merger (exclusive of options, warrants and other rights to purchase IPL
Stock). Secondly, because substantially all of the shares of IPL Stock to be
issued in the Merger will be controlled by one individual, current IPL
stockholders will be relegated to a minority position and may, therefore, not
receive any control premium if there were to be a
<PAGE> 10
subsequent sale of the combined businesses of IPL and ANDATACO. In addition, if
the Merger is consummated, IPL Stock will no longer be quoted on the Nasdaq
National Market System but, instead, will be quoted on the Nasdaq SmallCap
Market, which may reduce the volume of trading in shares of IPL Stock.
The Parties
IPL, founded in 1973, provides open-architecture storage solutions for
Hewlett Packard, Sun Microsystems, DEC Alpha, and IBM RS/6000 and AS/400
Business servers, as well as Novell NetWare and Window NT environments. The
principal executive offices of IPL, a Massachusetts corporation, are located at
124 Acton Street, Maynard, Massachusetts 01754, and its telephone number at such
offices is (508) 461-1000. IPL is the sole stockholder of Merger Sub, a Delaware
corporation. Merger Sub was formed solely to effect the Merger.
ANDATACO, founded in 1986 and headquartered in California, is a computer
storage and systems provider for UNIX and Windows NT environments. ANDATACO
designs high availability storage and backup solutions based on its proprietary
intelligent enclosure technology. ANDATACO distributes its own products, and
products from other manufacturers, through a network of 20 sales offices in the
United States and through business affiliates in Europe, Asia, Latin America,
Canada and Australia. The principal executive offices of ANDATACO, a California
corporation, are located at 10140 Mesa Rim Road, San Diego, California 92121,
and its telephone number at such offices is (619) 453-9191.
IPL's Reasons for the Merger. The proposed Merger follows sustained efforts
on the part of IPL's management to reverse losses from operations that have
generally continued since IPL changed its focus to the open systems market in
1995. After determining that operational results might be improved by expanding
IPL's distribution channels, management explored the possibility of various
strategic arrangements with third parties. Discussions with management of
ANDATACO evolved into a proposal to combine the companies through the proposed
Merger. The IPL Board believes that the Merger would allow IPL to realize
certain cost savings, to further penetrate the rapidly expanding open
architecture storage market and to have enhanced access to additional working
capital. A special committee of independent directors of IPL established to
evaluate the Merger (the "Special Committee") has determined that the Merger is
in the best interests of the IPL stockholders and IPL. In recommending the
Merger Proposals to the stockholders, the IPL Board has relied on the opinion of
its independent financial advisor, Needham & Company, Inc. ("Needham"). See "THE
MERGER PROPOSALS -- The Merger -- Background of the Merger," "-- IPL's Reasons
for the Merger" and "-- Fairness Opinion."
Fairness Opinion. Needham, a nationally recognized investment banking firm,
has acted as a financial adviser to the IPL Board in connection with the Merger
and has delivered to the IPL Board its written opinion that, subject to the
assumptions and qualifications stated by Needham therein, the consideration to
be paid by IPL to ANDATACO shareholders in the proposed Merger is fair to the
IPL stockholders from a financial point of view. Such fairness opinion is based
on financial forecasts provided by the management of IPL and ANDATACO as well as
current market, economic, financial and other conditions. The opinion of Needham
is attached to this Proxy Statement as Annex II and you are urged to read the
opinion carefully and in its entirety. Needham received a fee for its services.
See "THE MERGER PROPOSALS -- The Merger -- Fairness Opinion" and "CERTAIN OTHER
MATTERS RELATED TO THE MERGER -- Financial Advisors."
Effective Date. The Merger will become effective as soon as practicable
after satisfaction or waiver of all conditions to the Merger and at the time and
on the date that appropriate merger documents are duly filed with the Secretary
of State of Delaware and the Secretary of State of California (the "Effective
Date"). See "THE MERGER PROPOSALS -- The Merger -- Effective Date." Assuming all
conditions to the Merger are met, or waived where permissible, it is expected
that the Effective Date will occur on May 30, 1997, or as soon thereafter as
practicable.
Covenants. IPL and ANDATACO have made certain covenants and agreements with
each other in the Merger Agreement relating to, among other things, (i) the
conduct of each business prior to the Closing Date, (ii) allocation of expenses,
(iii) confidentiality and publicity and (iv) restrictions on engaging in
acquisition
2
<PAGE> 11
discussions with other parties. See "THE MERGER PROPOSALS -- The Merger
Agreement -- Representations, Warranties and Covenants" and "-- No
Solicitation."
Conditions of Merger. In addition to the approval of the Merger Proposals
by the IPL stockholders, the respective obligations of IPL and ANDATACO to
consummate the Merger are subject to certain conditions, including, but not
limited to, (i) all representations and warranties contained in the Merger
Agreement being accurate in all material respects as of the Closing Date; (ii)
all covenants and agreements contained in the Merger Agreement being performed
or waived prior to the Closing Date; (iii) the parties receiving the legal
opinions and other documents described in the Merger Agreement; (iv) the parties
receiving all required governmental and third party approvals; and (v) after
giving effect to the Merger, IPL Stock being listed or quoted on The Nasdaq
Stock Market or a national exchange. See "THE MERGER PROPOSALS -- The Merger
Agreement -- Conditions of Merger."
Sykes Noncompetition Agreement and Employment Agreement. The obligations of
ANDATACO and IPL to consummate the Merger are also subject to the condition that
IPL enter into a Noncompetition Agreement with Mr. Sykes that provides for
payments to him of $1,000,020 in equal installments of $200,004 on each of the
next five anniversaries of the Closing Date. The Merger Agreement also permits
ANDATACO to enter into an Employment Agreement with Mr. Sykes that provides for
payment of base salary to Mr. Sykes of $250,000 per year and certain other
benefits for each of the next five years, which agreement is terminable only for
cause or breach of the noncompetition agreement. See "THE MERGER
PROPOSALS -- The Merger Agreement -- Noncompetition Agreement" and "CERTAIN
OTHER MATTERS RELATING TO THE MERGER -- Employment Agreements -- Sykes
Employment Agreement."
No Solicitation. IPL has agreed (i) not to solicit, initiate or encourage
discussions with any person, other than ANDATACO, relating to the possible
acquisition of IPL or all or a majority of the assets or any capital stock of
IPL or any merger or other business combination with IPL (an "Acquisition
Transaction") or (ii) except to the extent required by fiduciary obligations
under applicable law as advised in writing by outside legal counsel, participate
in negotiations regarding, or furnish to any other person information with
respect to, any effort or attempt by any other person to do or to seek any
Acquisition Transaction. See "THE MERGER PROPOSALS -- The Merger Agreement -- No
Solicitation."
Termination of the Merger Agreement. The Merger Agreement may be terminated
prior to the Closing Date under certain circumstances, including at the election
of the IPL Board or the ANDATACO Board, if without fault of the terminating
party, the Closing Date shall not have occurred on or before July 31, 1997,
which date may be extended by mutual consent of the parties. See "THE MERGER
PROPOSALS -- The Merger Agreement -- Termination."
Termination Fee. IPL will be obligated to make a cash payment to ANDATACO
of $550,000 (the "Termination Fee") if the Merger Agreement is terminated under
certain circumstances, including IPL receiving an acquisition proposal from a
third-party which it does not reject. The Termination Fee could have the effect
of discouraging a third party from pursuing an acquisition transaction with IPL
because the cost of such acquisition, if successful, would be increased by the
amount of such Termination Fee. See "THE MERGER PROPOSALS -- The Merger
Agreement -- Termination Fee."
Escrow and Indemnity. On the Closing Date, ten percent of the number of
shares comprising the Merger Consideration will be deposited in escrow under an
escrow agreement (the "Escrow Agreement") to satisfy certain claims for which
IPL is entitled to be indemnified under the Merger Agreement. Additionally,
pursuant to the terms of the Merger Agreement, the ANDATACO shareholders are
entitled to receive an equivalent number of additional shares of IPL Stock to
satisfy certain claims for which such shareholders are entitled to be
indemnified under the Merger Agreement. See "THE MERGER PROPOSALS -- The Merger
Agreement -- Escrow and Indemnity."
Certain Federal Income Tax Consequences. The Merger is intended to qualify
as a reorganization under Section 368(a) of the Internal Revenue Code of 1986,
as amended (the "Code"), and should, therefore, constitute a non-taxable
transaction for holders of IPL Stock. For a discussion of these and other
federal
3
<PAGE> 12
income tax consequences in connection with the Merger, see "CERTAIN OTHER
MATTERS RELATED TO THE MERGER -- Certain Federal Income Tax Consequences."
Accounting Treatment. The Merger will be accounted for using the purchase
method of accounting. See "CERTAIN OTHER MATTERS RELATED TO THE
MERGER -- Accounting Treatment."
Appraisal Rights. Under the MBCL, no holder of IPL Stock has the right to
obtain cash payment for the "fair value" of such holder's IPL Stock in
connection with the Merger.
Interests of Certain Parties. Certain members of the IPL Board and
management may have interests respecting the Merger which are distinct from the
interests of holders of IPL Stock. Harris Ravine, a member of the IPL Board (but
not a member of the Special Committee), has entered into an employment agreement
with ANDATACO pursuant to which he has become the Chief Executive Officer of
ANDATACO as of May 1, 1997. Mr. Sykes required that Mr. Ravine's acceptance of
such an agreement be a condition to ANDATACO's obligation to close the Merger.
Furthermore, until May 1, 1997 Mr. Ravine was a managing director of BI Capital
Ltd., which has earned $50,000 for providing financial advice and negotiating
assistance in connection with the Merger and will receive a $50,000 "success
fee" upon consummation of the Merger. Mr. Ravine played an instrumental role in
negotiating the terms of the Merger on behalf of IPL. In addition, three of the
executive officers of IPL have severance agreements, which provide certain
benefits in the event such officers are either terminated or resign for certain
reasons following a change in control transaction, such as the Merger. See "THE
MERGER PROPOSALS -- The Merger -- Interests of Certain Persons in the Merger"
and "CERTAIN OTHER MATTERS RELATING TO THE MERGER -- Employment
Agreements -- Ravine Employment Agreement."
Recommendation of the Board of Directors of IPL. THE IPL BOARD UNANIMOUSLY
RECOMMENDS THAT IPL STOCKHOLDERS VOTE TO ADOPT THE MERGER PROPOSALS.
IPL Market Prices. The IPL Stock is currently traded on the Nasdaq National
Market under the symbol "IPLS." If the Merger is consummated, the IPL Stock
listing will be transferred to the Nasdaq SmallCap Market; see "CERTAIN OTHER
MATTERS RELATING TO THE MERGER -- Listing." The following table sets forth, for
the periods indicated, the range of high and low per share sales prices for IPL
Stock as reported by Nasdaq. IPL has never distributed cash dividends and does
not anticipate doing so in the foreseeable future.
<TABLE>
<CAPTION>
IPL
----------------
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............................ 65/16 2 3/4
1996
First Quarter............................. 5 7/8 2 1/2
Second Quarter............................ 8 1/4 3 1/2
Third Quarter............................. 4 1/4 1 7/8
Fourth Quarter............................ 2 1/2 1 1/4
1997
First Quarter............................. 2 3/4 111/16
Second Quarter (through May 1, 1997)...... 2 1/8 1 3/8
</TABLE>
On February 10, 1997, IPL and ANDATACO publicly announced that they had
executed a letter of intent regarding the proposed Merger. On February 7, 1997,
the trading day immediately preceding such announcement, there were no reported
trades in IPL Stock. On February 6, 1997, the stock had high, low and last sale
prices of 2 1/16, 1 15/16 and 2, respectively. On May 1, 1997, IPL Stock closed
at 1 11/16.
4
<PAGE> 13
ANDATACO Dividends. ANDATACO is a privately held company and, consequently,
there is no public market for ANDATACO Stock. Accordingly, the following table
indicates only cash dividends paid. Pursuant to the terms of the Merger
Agreement, immediately prior to the Closing Date, ANDATACO is entitled to make a
distribution to its shareholders equal to the taxes payable by such shareholders
with respect to the earnings and profits of ANDATACO for the short S corporation
taxable period ending as of the Closing Date.
<TABLE>
<CAPTION>
ANDATACO
DIVIDENDS
---------
(IN
DOLLARS)
<S> <C>
1995........................................................... 0
1996........................................................... 2,955,000
1997 (through January 31, 1997)................................ 0
</TABLE>
5
<PAGE> 14
IPL SELECTED FINANCIAL DATA
(HISTORICAL)
The following table presents selected historical financial statement data
of IPL and its consolidated subsidiaries. The consolidated balance sheet
financial information as of December 31, 1992, 1993 and 1994 and the
consolidated statement of operations financial information for the years ended
December 31, 1992 and 1993 have been derived from IPL's audited consolidated
financial statements which are not included herein. The consolidated financial
statements as of December 31, 1995 and 1996 and for each of the years in the
three-year period ended December 31, 1996 have been derived from IPL's audited
financial statements. Such statements and the report of Deloitte & Touche LLP
relating thereto are included herein, and the selected financial data presented
below are qualified in their entirety by reference thereto. The data should be
read in conjunction with the historical financial statements and notes thereto,
and IPL Management's Discussion and Analysis of Financial Condition and Results
of Operations, included in this Proxy Statement. Dollar amounts are in
thousands, except for per share amounts.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------------
1992 1993 1994 1995 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Revenues...................... $ 53,572 $ 39,721 $ 29,949 $ 24,764 $ 17,064
Net Income (loss)............. $ 3,053 $ (2,451) $ (15,046)(1) $ (3,464)(2) $ (2,142)(3)
Net income (loss) per share... $ 0.56 $ (0.47) $ (2.80) $ (0.63) $ (0.38)
Weighted average common shares
outstanding................. 5,435,649 5,235,964 5,381,519 5,469,177 5,617,926
BALANCE SHEET(4):
Working capital............... $ 25,935 $ 21,549 $ 8,285 $ 6,195 $ 4,921
Total assets.................. $ 39,355 $ 37,757 $ 18,764 $ 13,742 $ 10,614
Long-term debt................ -- -- -- -- --
Stockholders' equity.......... $ 28,399 $ 26,398 $ 11,352 $ 8,543 $ 6,550
Current Ratio................. 3.4:1 2.9:1 2.1:1 2.2:1 2.2:1
</TABLE>
- ---------------
(1) Includes a $1,971,000 restructuring charge. (See Note 12 the IPL financial
statements included herein.)
(2) Includes a $497,000 restructuring charge. (See Note 12 to the IPL financial
statements included herein.)
(3) Includes a $100,000 reduction of restructure expense. (See Note 12 to the
IPL financial statements included herein.)
(4) End of period.
6
<PAGE> 15
ANDATACO SELECTED FINANCIAL DATA
(HISTORICAL)
The following annual financial data for each of the years 1992 through
1996, has been derived from ANDATACO's audited financial statements, including
the balance sheets at October 31, 1995 and 1996 and the related statements of
operations and of cash flows for each of the three years in the period ended
October 31, 1996 and notes thereto appearing elsewhere herein. The data for the
three months ended January 31, 1996 and 1997 has been derived from unaudited
financial statements also appearing herein and which, in the opinion of
ANDATACO's management, include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the results for the
unaudited interim periods. The data should be read in conjunction with such
historical financial statements and the notes thereto, and ANDATACO Management's
Discussion and Analysis of Financial Condition and Results of Operations,
included in this Proxy Statement. Dollar amounts are in thousands, except for
per share amounts.
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED
FOR THE YEARS ENDED OCTOBER 31, JANUARY 31,
------------------------------------------------ -----------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Revenues....................... $50,949 $71,703 $83,559 $100,048 $99,733 $25,551 $25,497
Net income (loss).............. $ 81 $ 53 $ (202) $ 2,106 $ 39 $ (404) $ (110)
Net income (loss) per share.... $ (8.10) $ 5.30 $(20.20) $ 210.60 $ 3.90 $(40.40) $(11.00)
Weighted average common shares
outstanding.................. 10,000 10,000 10,000 10,000 10,000 10,000 10,000
BALANCE SHEET(1):
Working capital................ $ 2,519 $ 2,104 $ 2,069 $ 3,639 $ 8,932 $ 8,609 $10,734
Total assets................... $13,035 $19,948 $18,285 $ 26,481 $23,667 $25,187 $23,933
Long-term debt................. $ 3,101 $ 4,004 $ 4,100 $ 3,483 $12,122 $ 9,443 $14,041
Stockholders' (deficit)
equity....................... $ 169 $ 214 $ 12 $ 2,118 $ (798) $ 1,716 $ (908)
Current Ratio.................. 1.2:1 1.1:1 1.1:1 1.2:1 1.7:1 1.6:1 2.0:1
</TABLE>
- ---------------
(1) End of period.
7
<PAGE> 16
UNAUDITED PRO FORMA SELECTED FINANCIAL INFORMATION
Although as a legal matter ANDATACO will become a subsidiary of IPL, the
Merger will be accounted for as a purchase of IPL by ANDATACO for accounting and
financial reporting purposes. Accordingly, the following table presents certain
selected unaudited pro forma financial data of IPL after giving effect to the
Merger, as if it had occurred as of January 31, 1997 in the case of the balance
sheet data presented and, in the case of statement of operations data, as if it
had occurred as of November 1, 1995. The pro forma statement of operations
financial information for the year ended October 31, 1996 is based on ANDATACO
data for the fiscal year ended October 31, 1996 and IPL data for the twelve
months ended September 30, 1996. The pro forma statement of operations financial
information for the three months ended January 31, 1997 is based on ANDATACO
data for that three month period and IPL data for the three months ended
December 31, 1996. The pro forma balance sheet financial information is based on
ANDATACO balance sheet data as of January 31, 1997 and IPL balance sheet data as
of December 31, 1996. This pro forma selected financial information is provided
for comparative purposes only and does not purport to be indicative of the
financial position or results of operations that would have been reported had
the Merger occurred during the periods or as of the dates for which pro forma
data are presented, or which may be attained in the future. See "UNAUDITED PRO
FORMA COMBINED FINANCIAL INFORMATION" and the financial statements of each of
ANDATACO and IPL contained elsewhere in this Proxy Statement.
<TABLE>
<CAPTION>
FOR THE
FOR THE YEAR THREE MONTHS ENDED
ENDED OCTOBER 31, JANUARY 31,
1996 1997
----------------- ------------------
<S> <C> <C>
STATEMENT OF OPERATIONS:
Revenues.................................................... $ 121,391 $ 27,919
Net income (loss)........................................... $ (2,563) $ (1,371)
Net income (loss) per share(1).............................. $ (0.11) $ (0.06)
Weighted average common shares outstanding(1)............... 24,263,000 24,247,000
</TABLE>
<TABLE>
<CAPTION>
AS OF
JANUARY 31,
1997
--------------------------------------
<S> <C> <C>
BALANCE SHEET:
Working capital............................................. $15,670
Total assets................................................ $39,870
Long-term debt.............................................. $14,041
Stockholders' equity........................................ $10,965
Current Ratio............................................... 2.7:1
</TABLE>
- ---------------
(1) The per share information assumes the issuance of an aggregate of 18,487,000
shares of IPL Stock in the Merger.
8
<PAGE> 17
COMPARATIVE PER SHARE FINANCIAL INFORMATION
The pro forma book value of IPL Stock at January 31, 1997 after giving
effect to the Merger would be $0.45 per share. The following unaudited financial
information reflects certain comparative per share data related to book value
and income from operations: (i) on a historical basis for IPL and ANDATACO Stock
and (ii) on an pro forma basis per share of IPL Stock after giving effect to the
Merger.
The information shown below should be read in conjunction with the
consolidated historical financial statements included herein. For a description
of the data used in the calculations below and certain qualifications regarding
this data, please see "UNAUDITED PRO FORMA SELECTED FINANCIAL INFORMATION" on
the prior page.
<TABLE>
<CAPTION>
IPL STOCK ANDATACO STOCK
------------------------------------ ---------------------------
SEPTEMBER 30, DECEMBER 31, OCTOBER 31, JANUARY 31,
1996 1996 1996 1997
------------- ------------------ ----------- -----------
<S> <C> <C> <C> <C>
Book Value Historical................. $1.34 $1.16 ($79.80) ($90.80)
</TABLE>
<TABLE>
<CAPTION>
FOR THE
THREE MONTHS ENDED
DECEMBER 31,
FOR THE YEAR ENDED ---------------------------
SEPTEMBER 30, 1996 1995 1996
------------------ ----------- -----------
<S> <C> <C> <C>
IPL
Primary Income (Loss) Per Share
from Continuing Operations:
Historical......................................... $(0.27) $(0.07) $(0.18)
Pro Forma.......................................... $(0.11) -- $(0.06)
Common Dividends Paid Per Share:
Historical......................................... -- -- --
Pro Forma.......................................... -- -- --
</TABLE>
<TABLE>
<CAPTION>
FOR THE
THREE MONTHS ENDED
JANUARY 31,
FOR THE YEAR ENDED ---------------------------
OCTOBER 31, 1996 1996 1997
------------------ ----------- -----------
<S> <C> <C> <C>
ANDATACO
Income (Loss) Per Common Share:
Historical......................................... $ 3.90 $(40.40) $(11.00)
Common Dividends Paid Per Share:
Historical......................................... $ 295.50 -- --
</TABLE>
9
<PAGE> 18
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The following tables set forth unaudited pro forma combined financial
information to reflect the effect of the Merger using the purchase method of
accounting. The unaudited pro forma combined statements of operations for the
year ended October 31, 1996 and for the three month period ended January 31,
1997 give effect to the Merger, including the issuance of approximately
18,487,000 Merger Shares, as of November 1, 1995. The unaudited pro forma
combined balance sheet as of January 31, 1997 has been prepared as if the Merger
was consummated on January 31, 1997.
Although as a legal matter the Merger will result in ANDATACO becoming a
subsidiary of IPL, the Merger will be accounted for as a reverse acquisition of
IPL by ANDATACO under the purchase method of accounting. Based on the Fair Value
of $2.06 per share of IPL Stock, ANDATACO anticipates that the excess purchase
price over the net assets of IPL that are deemed to be purchased will be
approximately $4.9 million. This estimated amount will be subject to adjustment
based on the allocation of the purchase price as of the Closing Date. The Fair
Value of IPL Stock is based on the average market price of IPL Stock for a
period before and after the announcement of the proposed Merger on February 10,
1997.
The historical information presented for IPL (i) for the year ended
September 30, 1996 is derived from the unaudited financial statements for the
twelve months then ended, (ii) as of December 31, 1996 is derived from the
audited financial statements as of such date and (iii) for the three months
ended December 31, 1996, is derived from the unaudited financial statements for
the period then ended.
The historical information for ANDATACO (1) for the year ended October 31,
1996, is derived from the audited financial statements of ANDATACO for the year
then ended, and (ii) as of January 31, 1997, and for the three months then
ended, is derived from the unaudited financial statements as of and for the
period then ended.
The unaudited pro forma combined financial statements have been prepared by
IPL's and ANDATACO's management. The unaudited pro forma data are not designed
to represent and do not represent what the combined results of operations or
financial position would have been had the Merger been completed on or as of the
dates assumed, and are not intended to project the combined results of
operations for any future period or as of any future date. The unaudited pro
forma combined financial statements give effect to the Merger but do not reflect
expenses and nonrecurring charges that will result from the Merger or estimated
expense reductions, including elimination of duplicate facilities and personnel
costs, that are expected to result from the Merger. The unaudited pro forma
combined financial statements should be read in conjunction with the financial
statements and notes of IPL and ANDATACO included elsewhere in this Proxy
Statement.
10
<PAGE> 19
PRO FORMA COMBINED BALANCE SHEET (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL
------------------------------------ PRO FORMA
ANDATACO IPL ----------------------------
JANUARY 31, 1997 DECEMBER 31, 1996 ADJUSTMENTS COMBINED
---------------- ----------------- ----------- --------
<S> <C> <C> <C> <C>
ASSETS:
Current Assets:
Cash........................... $ 338 $ 2,274 $ -- $ 2,612
Accounts receivable............ 12,670 2,391 -- 15,061
Inventories.................... 8,102 3,892 15(2) 12,009
Other current assets........... 257 428 -- 685
------- --------- ------- -------
Total current assets...... 21,367 8,985 15 30,367
Property and equipment, net....... 2,418 1,629 326(2) 4,373
Other assets...................... 148 -- -- 148
Goodwill.......................... -- -- 4,982(3) 4,982
------- --------- ------- -------
$23,933 $ 10,614 $ 5,323 $39,870
======= ========= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIT):
Current Liabilities:
Accounts payable............... $ 8,244 $ 3,189 -- $11,433
Accrued expenses, deferred
revenue and accrued warranty
costs........................ 2,225 875 -- 3,100
Current portion of notes
payable...................... 164 -- -- 164
------- --------- ------- -------
Total current
liabilities............. 10,633 4,064 -- 14,697
------- --------- ------- -------
Long-term liabilities:
Bank line of credit............ 9,000 -- -- 9,000
Bonuses payable................ 167 -- -- 167
Notes payable, less current
portion...................... 114 -- -- 114
Shareholder loan............... 4,927 -- -- 4,927
------- --------- ------- -------
Total long-term
liabilities............. 14,208 -- -- 14,208
------- --------- ------- -------
Shareholders' equity (deficit):
Common stock Class A........... 2 56 166(1) 224
Accumulated paid in capital.... -- 17,379 (6,638)(1)(4) 10,741
Accumulated deficit............ (910) (10,885) 11,795(1)(4) --
------- --------- ------- -------
Total shareholders' equity
(deficit)............... (908) 6,550 5,323 10,965
------- --------- ------- -------
$23,933 $ 10,614 $ 5,323 $39,870
======= ========= ======= =======
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
11
<PAGE> 20
PRO FORMA COMBINED STATEMENT OF OPERATIONS (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL
--------------------------------------
ANDATACO IPL
THREE MONTHS THREE MONTHS PRO FORMA
ENDED ENDED -----------------------------
JANUARY 31, 1997 DECEMBER 31, 1996 ADJUSTMENTS COMBINED
---------------- ----------------- ---------- ----------
<S> <C> <C> <C> <C>
Sales.......................... $25,497 $ 2,422 $ -- $ 27,919
Cost of Sales................ 19,505 1,043 -- 20,548
------- --------- ---------- ----------
Gross Profit.............. 5,992 1,379 -- 7,371
Selling, general and
administrative expenses...... 5,293 1,995 265(6)(7) 7,553
Research and development....... 464 383 -- 847
------- --------- ---------- ----------
Income (loss) from
operations................... 235 (999) (265) (1,029)
Other income (expenses):
Interest income.............. -- 3 -- 3
------- --------- ---------- ----------
Interest expense............. (345) -- -- (345)
------- --------- ---------- ----------
Total other income
(expenses).............. (345) 3 -- (342)
Loss before provision for
taxes........................ (110) (996) (265) (1,371)
Provision for income taxes..... -- -- -- --
------- --------- ---------- ----------
Net loss....................... $ (110) $ (996) $ (265) $ (1,371)
======= ========= ========== ==========
Earnings per common share:
Net loss per share........... -- $ (0.18) -- $ (0.06)
======= ========= ========== ==========
Shares used in computing net
loss per share............... -- 5,618,000 18,487,000 24,105,000
======= ========= ========== ==========
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
12
<PAGE> 21
PRO FORMA COMBINED STATEMENT OF OPERATIONS (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL
-----------------------------
ANDATACO IPL
YEAR ENDED YEAR ENDED PRO FORMA
OCTOBER 31, SEPTEMBER 30, ---------------------------
1996 1996 ADJUSTMENTS COMBINED
----------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
Sales................................... $99,733 $ 21,658 $ -- $ 121,391
Cost of Sales......................... 80,375 12,689 15 93,079
------- --------- ---------- ----------
Gross Profit....................... 19,358 8,969 (15)(5) 28,312
Selling, general and administrative
expenses.............................. 17,569 9,362 1,061(6)(7) 27,992
Research and development................ 919 1,408 -- 2,327
Restructuring expenses.................. -- (100) -- (100)
------- --------- ---------- ----------
Income (loss) from operations........... 870 (1,701) (1,076) (1,907)
Other income (expenses):
Interest income....................... 1 147 -- 176
Interest expense...................... (773) -- -- (773)
Other................................. (59) 28 -- (59)
------- --------- ---------- ----------
Total other income (expenses)...... (831) 175 -- (656)
------- --------- ---------- ----------
Income (loss) before provision for
taxes................................. 39 (1,526) (1,076) (2,563)
Provision for income taxes.............. -- -- -- --
------- --------- ---------- ----------
Net income (loss)....................... $ 39 $ (1,526) $ (1,076) $ (2,563)
======= ========= ========== ==========
Earnings per common share:
Net loss per share.................... -- $ (0.27) -- $ (0.11)
======= ========= ========== ==========
Shares used in computing net loss per
share................................. -- 5,634,000 18,487,000 24,121,000
======= ========= ========== ==========
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
13
<PAGE> 22
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
A. ADJUSTMENTS
The accompanying unaudited pro forma financial statements have been
adjusted to give effect to the Merger. Pro forma adjustments are made to
reflect:
(1) The issuance of the Merger shares and the elimination of the common
shareholders' equity accounts of IPL totalling $10,885,000.
(2) The estimated fair value of the IPL net assets acquired by ANDATACO.
(3) The excess of acquisition cost over the Fair Value of net assets
acquired (i.e., goodwill).
(4) The elimination of ANDATACO's $910,000 accumulated deficit against
additional paid in capital in connection with ANDATACO's change from a
Subchapter S Corporation to a C Corporation effective at the Effective
Date.
(5) Increase in cost of sales reflecting the sale of the inventory
acquired.
(6) Additional depreciation resulting from increased basis of property and
equipment acquired, based on estimated average useful lives of five
years.
(7) Amortization of goodwill on a straight-line basis over five years.
(8) No adjustment has been made for the distribution to the ANDATACO
shareholder for taxes payable by such shareholder with respect to the
earnings of ANDATACO for the short S corporation taxable period as of
the Closing Date due to estimated operating losses at that date.
(9) No adjustment has been made to record the commitments entered into in
the Employment Agreements and Noncompetition Agreement of Mr. Ravine
and Mr. Sykes as the annual nonrecurring salary of the ANDATACO
shareholder reflected in the accounts for the year ended October 31,
1996 and the three months ended January 31, 1997 exceed the amounts
payable under the above agreements.
B. INCOME TAXES
With respect to the pro forma balance sheet, the Company has provided a
deferred tax asset valuation allowance for net deferred tax assets which "more
likely than not" will not be realized based on recent operating results.
With respect to the pro forma statements of operations, the tax provision
is calculated giving effect to the change of ANDATACO from a Subchapter S
corporation to a Subchapter C corporation, assuming that such change occurred on
November 1, 1995. No income tax provision or benefit was recorded for the year
ended October 31, 1996 and the three months ended January 31, 1997, due to net
losses incurred during those periods, which losses have not resulted in the
recording of an income tax benefit due to a full valuation allowance also being
recorded.
C. NET LOSS PER SHARE
Pro forma per share calculations are based upon the weighted average number
of pre-merger shares of common stock outstanding plus the aggregate number of
shares to be issued in connection with the merger.
14
<PAGE> 23
THE MEETING
RECORD DATE; OUTSTANDING SECURITIES
This Proxy Statement and enclosed proxy are being furnished in connection
with the solicitation by the IPL Board of proxies in the enclosed form for use
at the Meeting to be held on May 29, 1997, at 10:00 a.m. at the offices of IPL.
The IPL Board has fixed the close of business on April 14, 1997 as the Record
Date. Only the holders of shares of IPL Stock of record at the close of business
on the Record Date are entitled to receive notice of and to vote at the Meeting.
At the Record Date, there were 5,633,819 shares of IPL Stock outstanding, which
were held of record by approximately 278 holders, and there were approximately
3,000 beneficial owners.
PURPOSE OF THE MEETING
At the Meeting, the stockholders of IPL will consider and vote upon (i)
fixing the number of directors at four; (ii) the election of the IPL Board;
(iii) the Merger Proposals relating to the Merger Agreement pursuant to which
the Merger and the other transactions contemplated by the Merger Agreement are
to be consummated, including the issuance to holders of ANDATACO equity shares
or rights to acquire shares representing approximately 74.8% of the IPL Stock
deemed outstanding after the Merger; and (iv) proposed amendments to the Equity
Plan which would increase the number of shares of IPL Stock covered by such plan
from 650,000 to 2,500,000 and increase the number of shares issuable to any
participant from 250,000 to 1,000,000. The Merger Proposals include (i) adopting
an amendment to IPL's Articles of Organization which increases the number of
authorized shares of Class A Common Stock, $0.01 par value per share, from
20,000,000 to 30,000,000 and (ii) the issuance of up to approximately 18,486,936
shares of IPL Stock, which includes 1,848,694 shares which may be issuable to
ANDATACO shareholders only in connection with an obligation of IPL to indemnify
such shareholders. See "THE MERGER PROPOSALS -- The Merger Agreement -- Escrow
and Indemnity."
REQUIRED VOTE
A majority of the shares of IPL Stock outstanding as of the Record Date,
represented in person or by proxy at the Meeting, will constitute a quorum. Each
share of IPL Stock is entitled to one vote. The Merger Proposals must be adopted
by the affirmative vote of a majority of the shares of IPL Stock outstanding as
of the Record Date; directors will be elected by a plurality of the votes cast;
and the amendments to the Equity Plan will require the affirmative vote of a
majority of the shares of IPL Stock present, or represented, and entitled to
vote at the Meeting. Shares represented by proxies which are marked "abstain"
and proxies relating to "street name" shares for which the authority to vote is
withheld will be counted for purposes of determining a quorum but will not be
treated as votes cast and, therefore, will have the effect of negative votes
with regard to the Merger Proposals. Broker non-votes will not be counted as
present or represented in connection with the vote to approve the proposed
amendments to the Equity Plan; abstentions, however, will be counted as present
and entitled to vote and, accordingly, will have the effect of negative votes.
Directors and executive officers of IPL who as of the Record Date owned 891,412
shares of IPL Stock, or approximately 15.8% of the outstanding shares on such
date, have agreed to vote their shares in favor of the Merger Proposals.
THE IPL BOARD BELIEVES THAT THE MERGER IS IN THE BEST INTERESTS OF IPL AND
ITS STOCKHOLDERS AND UNANIMOUSLY RECOMMENDS A VOTE TO ADOPT THE MERGER
PROPOSALS.
VOTING OF PROXIES
All proxies that are properly executed and returned will be voted at the
Meeting in accordance with the instructions thereon, unless previously revoked.
IF A PROXY IS SUBMITTED AND NO DIRECTIONS ARE GIVEN, THE PROXY WILL BE VOTED FOR
THE MERGER PROPOSALS, FOR THE AMENDMENTS TO THE EQUITY PLAN AND FOR THE ELECTION
OF ALL NOMINEES FOR DIRECTORS LISTED IN THE PROXY. The execution of a proxy will
not affect a stockholder's right to attend the Meeting and vote in person. ANY
STOCKHOLDER GIVING A PROXY HAS THE POWER TO REVOKE THE PROXY
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<PAGE> 24
PRIOR TO ITS EXERCISE. A PROXY MAY BE REVOKED BY (a) FILING WITH THE CLERK, AT
OR BEFORE THE TAKING OF THE VOTE AT THE MEETING, (1) A WRITTEN NOTICE OF
REVOCATION SPECIFYING THE NUMBER OF SHARES AND CLEARLY IDENTIFYING THE PROXY TO
BE REVOKED OR (2) A DULY EXECUTED NEW PROXY BEARING A LATER DATE, OR (b)
ATTENDING THE MEETING AND VOTING IN PERSON (ALTHOUGH ATTENDANCE AT THE MEETING
WILL NOT IN AND OF ITSELF CONSTITUTE A REVOCATION OF A PROXY). ANY WRITTEN
NOTICE OF REVOCATION OR SUBSEQUENT PROXY SHOULD BE SENT AND DELIVERED TO IPL
SYSTEMS, INC., 124 ACTON STREET, MAYNARD, MASSACHUSETTS 01754, ATTENTION: CLERK,
OR HAND DELIVERED TO THE CLERK BEFORE THE TAKING OF THE VOTE AT THE MEETING. IN
ADDITION, STOCKHOLDERS WHOSE SHARES OF IPL ARE NOT REGISTERED IN THEIR OWN NAMES
WILL NEED ADDITIONAL DOCUMENTATION FROM THE RECORD HOLDERS OF SUCH SHARES TO
VOTE PERSONALLY AT THE MEETING.
The prompt return of your proxy will be appreciated and helpful in
obtaining the necessary quorum. Whether or not you expect to attend the Meeting,
please sign the proxy and return it in the enclosed envelope.
EXPENSES OF SOLICITATION
IPL will bear the cost of the solicitation of proxies on behalf of the IPL
Board, including the charges and expenses of brokerage firms and others of
forwarding solicitation material to beneficial owners of IPL stock. In addition
to use of the mails, proxies may be solicited by officers and employees of IPL
in person or by telephone. IPL has retained Chase Mellon Shareholder Services,
L.L.C., for assistance in connection with soliciting proxies for a fee of $6,500
plus reasonable out-of-pocket expenses.
SELECTION OF AUDITORS
The firm of Deloitte & Touche LLP, 125 Summer Street, Boston, Massachusetts
has served as auditors for IPL since 1976. In light of the change in control
contemplated by the Merger Agreement, IPL has not yet selected an independent
auditor for the current fiscal year. Representatives of Deloitte & Touche LLP
are expected to be present at the meeting with an opportunity to make a
statement if they desire to do so and are expected to be available to respond to
appropriate questions.
MISCELLANEOUS
The persons named as proxies by a stockholder may propose and vote for one
or more adjournments or postponements of the Meeting to permit further
solicitation of proxies; provided, however, that no proxy that is voted against
the proposal to approve and adopt the Merger Proposals will be voted in favor of
any such adjournment or postponement. If any other matters should properly come
before the Meeting, the persons named in the proxy will vote in accordance with
their best judgment.
FURTHER INFORMATION
If you have any questions about giving your proxy or require assistance,
please contact the following individual:
Anita D. Buchanan
IPL Systems, Inc.
124 Acton Street
Maynard, MA 01754
(508) 461-1000
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<PAGE> 25
THE MERGER PROPOSALS
THE MERGER
General. The Merger Agreement provides for the merger of Merger Sub, a
wholly owned subsidiary of IPL, with and into ANDATACO. If the Merger Proposals
are adopted by the IPL stockholders, certain additional conditions are satisfied
or waived and the Merger is consummated, ANDATACO will become a wholly-owned
subsidiary of IPL and IPL will be controlled by ANDATACO shareholders. Based on
the 5,633,819 shares of IPL Stock outstanding on March 22, 1997 and up to
594,400 additional shares of IPL Stock reserved for issuance upon exercise of
options and other rights to acquire IPL Stock on such date, approximately
18,486,936 shares of IPL Stock will be issued or reserved for issuance as the
Merger Consideration as of the Closing Date.
As a result of the Merger, at the Effective Date, ANDATACO Stock deemed
outstanding will be converted as provided in the Merger Agreement into the
Merger Consideration. The Merger Consideration will be allocated pro rata among
the holders of ANDATACO Stock and rights to acquire ANDATACO Stock.
Background of the Merger. IPL's management has made sustained efforts to
reverse negative earnings that have generally continued since IPL changed its
focus to the open systems market in 1995. During the first quarter of 1996, IPL
considered a possible equity financing to raise additional working capital to
permit it to expand its product development and sales activities in this new
market. A decline in the market price of IPL Stock, however, made it unlikely
that IPL could raise additional capital at prices that the IPL Board would
consider fair to the existing stockholders. In addition, IPL sought a line of
credit to provide an alternative source of working capital to permit expansion
of its business, but after the decline in the results of its business after the
first quarter of 1996, IPL could not obtain a line of credit on terms that it
considered favorable in light of its expected requirements.
In June 1996 IPL had begun searching for opportunities to expand its
distribution channels. During the second half of 1996, the IPL Board vested Mr.
Gellert with primary responsibility for identifying potential strategic
partners. IPL engaged in discussions with a range of potential distributors and
other parties potentially interested in strategic arrangements, including
acquisition transactions. Based on Mr. Gellert's recommendation, each of the
independent directors of IPL was retained during the fourth quarter of 1996 to
assist Mr. Gellert in this effort. See "ELECTION OF DIRECTORS -- Consulting
Agreements with Directors" for a description of these arrangements. During 1996,
over twenty-five (25) companies were contacted.
In late September 1996, in connection with his exploration of potential
strategic arrangements, Mr. Gellert contacted Mr. Sykes by phone. On October 8,
1996, Mr. Gellert and Stephen Ippolito, Chairman of the Board of Directors and
Chief Engineer of IPL, attended an industry event in New York City. At the
event, Mr. Gellert and Mr. Ippolito spoke with several potential marketing
partners and met in person with Mr. Sykes.
This initial meeting was followed, over the next few months, by meetings of
executives and directors of each company at both ANDATACO's executive offices in
San Diego, California and IPL's executive offices in Maynard, Massachusetts.
Representatives of the companies also met at a trade show in Las Vegas.
By late 1996, both companies had determined that a combination of the
businesses appeared to make strategic sense. Accordingly, during late 1996 and
early 1997, IPL and ANDATACO executed a confidentiality agreement pursuant to
which the companies provided information to each other, and each obtained
background information regarding the other company's business, conducted due
diligence investigations, exchanged certain technology for testing and analysis
of the feasibility of integrating the technologies of the two companies and held
preliminary discussions regarding the parameters of a transaction between the
two companies. At a meeting of the IPL Board on December 20, 1996, the Board
reviewed the projected results for the fourth quarter and full year of 1996 and
the proposed plan for 1997, as well as the status of strategic discussions with
other parties regarding IPL's technology and opportunities for distribution
arrangements or
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<PAGE> 26
other relationships. After analyzing the suitability of a potential merger, the
Board authorized management to proceed with the merger negotiations. Based on
Mr. Ravine's breadth of experience in mergers and acquisitions and track record,
Mr. Ravine was asked to lead the negotiations on behalf of IPL.
As the discussions with ANDATACO progressed, the IPL Board determined at a
meeting on January 6, 1997 that they should retain Needham & Company, Inc.,
investment bankers, to act as IPL's independent financial advisor and, if an
acquisition transaction were agreed to, to deliver a fairness opinion concerning
the terms of such transaction. On January 10, 1997, IPL engaged Needham. BI
Capital, Ltd. ("BI Capital"), a private company of which Harris Ravine is a
principal, was retained to assist in negotiating a transaction with ANDATACO.
See "CERTAIN OTHER MATTERS RELATING TO THE MERGER -- Financial Advisors" and
"THE MERGER PROPOSALS -- The Merger -- Interests of Certain Persons in the
Merger." IPL's outside legal counsel also advised on tax, corporate and
securities law aspects of the transaction.
During early 1997, representatives from IPL and ANDATACO continued
negotiating the terms of the Merger Agreement. During this period, in addition
to formal IPL Board meetings, the IPL Board was kept informed on a regular basis
of the status of the negotiations and received drafts of the proposed Merger
Agreement. Mr. Gellert and Mr. Ravine played pivotal roles in such negotiations.
However, during a due diligence visit in the first week of February by Needham
representatives and Mr. Gellert at ANDATACO, Mr. Sykes indicated that certain
issues had been identified that made it unlikely that he would proceed with the
transaction. There were extensive discussions between Mr. Gellert and Mr. Sykes
on February 5 and 6 and based on mutually acceptable progress, Mr. Sykes
requested that Mr. Ravine join the discussions on February 7. On February 7 the
parties resolved to negotiate a letter of intent regarding the transaction. At
the end of such negotiations ANDATACO required that it be a condition to the
Merger that Mr. Ravine reach agreement with ANDATACO to be chief executive
officer of the combined entity. Mr. Gellert called a conference call meeting of
the IPL Board for the evening of February 9, at which meeting the IPL Board
reviewed and approved the proposed form of letter of intent setting forth the
principal terms of the transaction. On February 10, 1997 the parties executed a
letter of intent setting forth the terms of the proposed merger, and IPL and
ANDATACO jointly issued a press release regarding the transaction.
The directors of IPL other than Mr. Ravine met by conference telephone call
on February 14 and established the Special Committee, comprised of all of the
IPL directors other than Mr. Ravine, to evaluate the terms of any proposed
merger. The Special Committee also reviewed and approved, subject to approval by
ANDATACO, the proposed compensation for BI Capital's services to IPL.
During the following two weeks the parties and Needham completed their due
diligence and negotiation of the definitive Merger Agreement and the documents
contemplated thereby. The Special Committee and counsel met at IPL, with Mr.
Ravine participating by conference call, on February 26 to review the latest
draft of the proposed agreements and the remaining terms to be negotiated. Mr.
Gellert reported on a proposed OEM arrangement with ANDATACO that would go into
effect immediately. See " CERTAIN OTHER MATTERS RELATING TO THE MERGER -- OEM
Agreement." The IPL Board noted that no other proposals had been submitted to
IPL following the press release regarding the letter of intent on February 10.
The IPL Board also reviewed the prospects for IPL continuing as an independent
company or liquidating its operations and concluded that the Merger provided the
best alternative for potential appreciation in the value that IPL stockholders
could ultimately realize from their IPL Stock.
On February 28, 1997, the Special Committee considered the latest draft of
the Merger Agreement which had been negotiated by the parties. Presentations
were made by Needham, members of IPL's management and legal counsel. Needham
presented certain financial and other analyses and reviewed the basis of its
opinion that, as of the date of the meeting, the number of Merger Shares to be
received by the ANDATACO shareholders was fair from a financial point of view to
the IPL stockholders. After discussing IPL's alternatives in the event the
Merger was not consummated, the Special Committee recommended approval of the
Merger Agreement. After receiving the recommendation of the Special Committee,
the full IPL Board reviewed and discussed the terms of the Merger and
management's assessment of the Merger from financial, strategic and operating
standpoints. The IPL Board then unanimously approved the Merger, based
principally on its belief that the Merger provides greater value to IPL
stockholders than available alternative
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<PAGE> 27
courses of action. As of the meeting, no other potential strategic partners had
indicated serious interest in pursuing a transaction with IPL, and no such party
has subsequently emerged. Given IPL's lack of access to outside capital on
favorable terms and continuing negative cash flow, the IPL Board concluded that
the Merger provided IPL with its best opportunity to continue operations without
significantly scaling back overhead costs or selling significant assets.
Also on February 28, 1997, the members of the ANDATACO Board and the
ANDATACO shareholders unanimously approved the Merger. As a condition to
ANDATACO's execution and delivery of the Merger Agreement, all of the directors,
executive officers and 5% stockholders of IPL executed irrevocable proxies in
favor of ANDATACO agreeing to vote in favor of the Merger Proposal. Later, both
IPL and ANDATACO executed and delivered the Merger Agreement. On Monday, March
3, 1997, the transaction was publicly announced.
IPL's Reasons for the Merger. The IPL Board believes that the Merger will
result in greater value to IPL stockholders than would likely be realized in the
foreseeable future through continued independent operations by IPL. In reaching
its determination, the IPL Board considered a number of factors, including the
following:
(1) Management projections of negative cash flow through 1998 for IPL
as an independent entity and IPL's lack of access to outside sources of
capital on favorable terms;
(2) Efforts over an extended period of time to market IPL to a large
number of potential suitors yielded no other potentially attractive
transactions;
(3) A determination, after thorough analysis, that the Merger would
be more favorable to the IPL stockholders than either liquidation or
continuation of IPL's operation as an independent entity because, among
other things, a liquidation would likely result in lower value for the IPL
stockholders and the ability to continue independent operations for a
significant period was in doubt given limited cash resources;
(4) The advice of IPL's financial advisors, particularly Needham's
opinion that the Merger Consideration to be paid to the ANDATACO
shareholders pursuant to the Merger is fair, from a financial point of
view, to the stockholders of IPL;
(5) The anticipated advantages of the combination including access to
ANDATACO's distribution channels, which should allow IPL to focus on its
core engineering strengths;
(6) The availability of ANDATACO's existing $10 million line of
credit and the potential for using the combined revenues and current assets
of the two companies (which are more than five times the revenues and three
times the current assets, respectively, of IPL) to obtain additional
working capital through further debt or equity financings;
(7) An evaluation of the value of ANDATACO;
(8) Presentations concerning the legal and financial due diligence
conducted by IPL management, the IPL Board and its advisors;
(9) The fact that the Merger cannot be consummated without the
approval of 50% of the outstanding shares of IPL Stock; and
(10) The fact that the Merger Agreement permits the IPL Board, under
certain limited circumstances, to negotiate with third parties and to
accept more favorable proposals, if any are received.
The Special Committee and the IPL Board also considered a number of
potentially negative factors relative to the fairness of the transaction
including, but not limited to: (i) the fact that, after the Merger, current IPL
stockholders would be relegated to a minority position and, therefore, possibly
not receive a control premium upon a subsequent sale of IPL and (ii) that
consummation of the Merger will result in IPL losing its status as a Nasdaq
National Market company. See "CERTAIN OTHER MATTERS RELATING TO THE
MERGER -- Listing."
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<PAGE> 28
In addition to the factors enumerated above, the Special Committee
recognized that certain members of the IPL Board have interests that are
disparate from the interests of the IPL stockholders and that may present them
with actual or potential conflicts of interest in connection with the Merger.
See "-- Interests of Certain Persons in the Merger" and "CERTAIN OTHER MATTERS
RELATING TO THE MERGER -- Employment Agreements -- Ravine Employment Agreement."
The Special Committee determined that such actual or potential conflicts of
interest neither supported nor detracted from the fairness of the Merger to the
IPL stockholders.
In view of the number of factors considered by the Special Committee and
the IPL Board, and the disparate nature of these factors, neither the Special
Committee nor the IPL Board assigned relative weights to the factors considered
in reaching their conclusions.
Fairness Opinion. Pursuant to a letter agreement dated January 10, 1997,
the IPL Board engaged Needham to act as its financial advisor in connection with
the Merger. In connection with this engagement, IPL requested Needham to render
an opinion as to whether or not the consideration to be paid by IPL to the
shareholders of ANDATACO in the Merger was fair to the stockholders of IPL from
a financial point of view. Needham was not requested to, and did not, make any
recommendation to the IPL Board as to the specific value of ANDATACO. The amount
of consideration to be paid in the Merger was determined through negotiations
between IPL's management and ANDATACO's management.
At a meeting of the IPL Board on February 28, 1997, Needham delivered its
opinion that, as of such date and based upon the matters described therein, the
consideration to be paid to the shareholders of ANDATACO in the Merger is fair
to the stockholders of IPL from a financial point of view. NEEDHAM'S OPINION IS
DIRECTED ONLY TO THE FINANCIAL TERMS OF THE MERGER AGREEMENT AND DOES NOT
CONSTITUTE A RECOMMENDATION TO ANY STOCKHOLDER OF IPL AS TO HOW SUCH STOCKHOLDER
SHOULD VOTE AT THE MEETING.
Needham is not expressing any opinion as to the prices at which IPL's Stock
will trade at any time. The complete text of the February 28, 1997 opinion (the
"Needham Opinion"), which sets forth the assumptions made, matters considered
and limitations on the review undertaken by Needham, is attached to this Proxy
Statement as Annex II, and the summary of the Needham Opinion set forth in this
Proxy Statement is qualified in its entirety by reference to the Needham
Opinion. IPL'S STOCKHOLDERS ARE URGED TO READ THE NEEDHAM OPINION CAREFULLY AND
IN ITS ENTIRETY FOR A DESCRIPTION OF THE PROCEDURES FOLLOWED, THE FACTORS
CONSIDERED AND THE ASSUMPTIONS MADE BY NEEDHAM.
In arriving at its opinion, Needham, among other things, (i) reviewed a
draft of the Merger Agreement dated February 27, 1997; (ii) reviewed certain
other documents related to the Merger; (iii) reviewed certain publicly available
information concerning IPL and certain other relevant financial and operating
data of IPL and ANDATACO made available from the internal records of IPL and
ANDATACO; (iv) visited certain locations of ANDATACO's facilities; (v) held
discussions with members of senior management of IPL and ANDATACO concerning
their current and future business prospects; (vi) reviewed certain financial
forecasts and projections prepared by IPL's and ANDATACO's respective
managements; (vii) compared certain publicly available financial data of certain
companies whose securities are traded in the public markets, which Needham
deemed generally comparable to IPL and ANDATACO, to similar data for IPL and
ANDATACO; (viii) reviewed the financial terms of certain other business
combinations that Needham deemed generally relevant; (ix) reviewed the multiples
of financial and operating data paid by acquirors in certain other business
combinations that Needham deemed generally relevant; (x) reviewed the impact of
the Merger on IPL's and ANDATACO's projected operating results; (xi) reviewed
current and historical market closing prices and trading data for IPL Stock; and
(xii) performed and/or considered such other studies, analyses, inquiries and
investigations as Needham deemed appropriate. Needham assumed and relied upon,
without independent verification, the accuracy and completeness of the
information it reviewed for purposes of its opinion. With respect to ANDATACO's
and IPL's financial forecasts provided to Needham by their respective
managements, Needham assumed that such forecasts had been reasonably prepared on
bases reflecting the best currently available estimates and judgments of each
such management, at the time of preparation, of the separate future operating
and financial performances of ANDATACO and IPL, respectively. Needham also
discussed with IPL's management IPL's liquidity position, noting that manage-
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<PAGE> 29
ment projected net losses and negative cash flow through 1999. Needham did not
assume any responsibility for or make or obtain any independent evaluation,
appraisal or physical inspection of the assets or liabilities of IPL or
ANDATACO. The Needham Opinion states that it was based on economic, monetary and
market conditions existing as of the date of such opinion.
Based on this information, Needham performed a variety of financial
analyses of the Merger and the consideration to be paid by IPL. The following
paragraphs summarize the significant financial analyses performed by Needham in
arriving at its opinion presented to the IPL Board.
Contribution Analysis. Needham reviewed and analyzed the pro forma
contribution of each of ANDATACO and IPL to pro forma combined operational and
financial information as of and for a historical twelve-month period ("LTM") and
as projected for fiscal 1997. For purposes of this analysis, Needham used
historical and projected operational and financial information for IPL as of and
for the 12 months ended December 31, 1996 and 1997 and for ANDATACO as of and
for the 12 months ended October 31, 1996 and 1997. Needham did not adjust
ANDATACO's financial information to reflect ANDATACO's results on a calendar
year basis. Needham reviewed, among other things, the pro forma contributions to
revenues, gross profit and assets. Based on this analysis, ANDATACO contributed
85.4% of the LTM pro forma combined revenues, 71.9% of the LTM pro forma
combined gross profit and 69.0% of the pro forma combined assets and 86.6% of
the projected 1997 pro forma combined revenues, 78.0% of the projected 1997 pro
forma combined gross profit, and 72.6% of the projected pro forma combined
assets. Based on the Merger Consideration determined pursuant to the Merger
Agreement as of February 28, 1997, the shareholders of ANDATACO will own 74.8%
of IPL after the Merger. The results of the contribution analysis are not
necessarily indicative of the contributions that the respective businesses may
have in the future.
Comparable Company Analysis. Needham compared selected historical and
projected operating and financial ratios of ANDATACO to the corresponding data
and ratios of certain publicly traded distributors of electronic and computer
equipment components which it deemed generally comparable to ANDATACO. Such data
and ratios included total market capitalization to historical and projected
revenue, price per share to historical and projected earnings per share
("price-earnings") and market value to historical book value. Total market
capitalization for purposes of this analysis is defined as total market value
plus total debt minus cash. Periods analyzed included last twelve months ("LTM")
(which for the comparable companies represented the four most recent quarters
for which financial information was available and for ANDATACO represented the
12 months ended October 31, 1996), projected calendar 1996 (which for ANDATACO
represented the 12 months ended October 31, 1996), and projected calendar 1997
(which for ANDATACO represented the 12 months ending October 31, 1997).
Companies that distribute electronic and computer equipment components (the
"ANDATACO Comparables") included Arrow Electronics, Inc., Bell Microproducts
Inc., CDW Computer Centers, Inc., CompuCom Systems, Inc., Ingram Micro, Inc.,
Merisel, Inc., MicroAge, Inc. and Tech Data Corporation.
Needham also calculated multiples for ANDATACO based on the closing price
of IPL Stock on February 21, 1997 of $2.56 per share and assuming the issuance
of 18,629,412 shares of IPL Stock to the shareholders of ANDATACO in the Merger,
resulting in a total market value for purposes of this analysis of $47.7
million. For the ANDATACO Comparables, the multiples of total market
capitalization to LTM revenues ranged from 0.1 to 1.4 with a mean of 0.4 and a
median of 0.3, as compared with 0.6 for ANDATACO; the LTM price-earnings
multiples ranged from 14.2 to 28.6 with a mean of 19.7 and a median of 19.7, as
compared with 1,224.0 for ANDATACO; and the multiples of market value to
historical book value ranged from 1.1 to 9.3 with a mean of 3.8 and a median of
2.3; market value as a multiple of historical book value was deemed not
meaningful because ANDATACO's historical book value is negative. The multiples
of total market capitalization to projected 1996 revenues ranged from 0.1 to 1.3
with a mean of 0.4 and a median of 0.3, as compared with a multiple of 0.6 for
ANDATACO; the projected 1996 price-earnings multiples ranged from 12.4 to 36.0
with a mean of 19.1 and a median of 15.8, as compared with a multiple of 1,224.0
for ANDATACO; the multiples of total market capitalization to projected 1997
revenues ranged from 0.0 to 1.0 with a mean of 0.3 and a median of 0.2, as
compared with a multiple of 0.5 for ANDATACO; and
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<PAGE> 30
the projected 1997 price-earnings multiples ranged from 9.3 to 39.1 with a mean
of 18.0 and a median of 14.0, as compared with a multiple of 33.5 for ANDATACO.
Needham also compared selected historical and projected operating and
financial ratios of IPL to the corresponding data and ratios of certain publicly
traded manufacturers and distributors of redundant array of independent disk
("RAID") arrays and other computer memory and/or storage devices which it deemed
generally comparable to IPL. Such data and ratios included total market
capitalization to historical and projected revenue, price-earnings and market
value to historical book value. Periods analyzed included LTM (which for the
comparable companies represented the four most recent quarters for which
financial information was available and for IPL represented the 12 months ended
September 30, 1996), projected calendar 1996 and projected calendar 1997.
Companies that manufacture and distribute RAID arrays and other computer
memory and/or storage devices (the "IPL Comparables") include Adaptec, Inc.,
Cambex Corporation, Ciprico, Inc., Data General Corporation, EMC Corporation,
MTI Technology Corporation and Mylex Corporation
For the IPL Comparables, the multiples of total market capitalization to
LTM revenues ranged from 0.5 to 4.5 with a mean of 1.9 and a median of 1.4, as
compared with 0.6 for IPL; the LTM price-earnings multiples ranged from 11.1 to
28.5 with a mean of 18.8 and a median of 16.4; and the multiples of market value
to historical book value ranged from 1.4 to 7.8 with a mean of 4.1 and a median
of 2.4, as compared with 1.9 for IPL. The multiples of total market
capitalization to projected 1996 revenues ranged from 0.3 to 3.7 with a mean of
1.7 and a median of 1.2, as compared with a multiple of 0.7 for IPL; the
projected 1996 price-earnings multiples ranged from 5.2 to 24.1 with a mean of
16.7 and a median of 17.7; the multiples of total market capitalization to
projected 1997 revenues ranged from 0.4 to 3.1 with a mean of 1.7 and a median
of 1.2, as compared with a multiple of 0.7 for IPL; and the projected 1997
price-earnings multiples ranged from 14.1 to 18.5 with a mean of 16.0 and a
median of 15.0. Since IPL's LTM, projected 1996 and projected 1997 earnings were
negative, their respective multiples were not meaningful.
Comparable Transaction Analysis. Needham also analyzed publicly available
financial information for 30 selected mergers and acquisitions of companies in
the computer memory and storage industry. In examining these transactions,
Needham analyzed certain income statement and balance sheet parameters of the
acquired companies relative to the consideration offered, such as aggregate
transaction value as multiples of LTM revenues and target net sales, and
multiples of market value to LTM net income and historical book value. In
certain cases complete financial data was not publicly available for these
transactions and only partial information was used in such instances.
For these transactions, the multiples of transaction value to LTM sales
ranged from 0.1 to 4.2 with a mean of 1.4 and a median of 1.3, and the LTM
target net sales multiples ranged from 0.2 to 2.9 with a mean of 1.5 and a
median of 1.4. The multiples of market value to LTM net income ranged from 10.1
to 109.7 with a mean of 47.9 and a median of 40.7; and the multiples of market
value to book value ranged from 1.6 to 16.1 with a mean of 5.3 and a median of
4.0. Applying the applicable revenues, target net sales and book value of IPL
and ANDATACO (in the case of ANDATACO, adding to its negative book value the
subordinated shareholder note) to the applicable median acquisition multiples
yielded implied values of $22.6 million, $23.9 million and $25.9 million for IPL
and $132.3 million, $139.8 million and $16.3 million for ANDATACO.
Implied Market Valuation Analysis. Needham analyzed IPL and ANDATACO based
on an implied market valuation analysis of the projected performance of IPL and
ANDATACO. Needham used the projected financial results for IPL and ANDATACO for
each of the five fiscal years from 1997 through 2001 provided by the respective
managements of IPL and ANDATACO and derived implied market values by applying
the applicable multiples of the IPL Comparables and ANDATACO Comparables to
discounted projected revenue, net income, shareholders' equity and cash flow.
Needham used discount rates ranging from 20.0% to 50.0%, which Needham assumed
were representative of risks inherent in companies engaged in high technology
applications for the computer memory and storage industry. The resulting implied
market valuations for each of IPL and ANDATACO were then compared to the
combined implied market valuation of the two companies. Based upon the mean
projected 1997 multiples for the IPL Comparables of total
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market capitalization to revenues of 1.7, total market capitalization to net
income of 16.0, total market capitalization to shareholders' equity of 4.1 and
total market capitalization to cash flow of 7.0, and the mean projected 1997
multiples for the ANDATACO Comparables of total market capitalization to
revenues of 0.3, total market capitalization to net income of 18.0, total market
capitalization to shareholders' equity of 3.8 and total market capitalization to
cash flow of 7.0, and using a discount rate of 35.0%, IPL's implied market
valuations as a percentage of the combined implied market valuations ranged from
47.6% based upon projected 1997 revenues to 34.3% based upon projected 2001
revenues, 0.0% based upon projected 1997 net income to 2.1% based upon projected
2001 net income, and 91.4% based upon projected 1997 shareholders' equity to
19.7% based upon projected 2001 shareholders' equity. Comparisons based upon
cash flow for each company were not meaningful because IPL projected negative
cash flows through 1999 and ANDATACO projected negative cash flows in 2000 and
2001 due to debt repayments.
No company or transaction used in any comparable analysis as a comparison
is identical to ANDATACO, IPL or the Merger. Accordingly, these analyses are not
simply mathematical; rather, they involve complex considerations and judgments
concerning differences in the financial and operating characteristics of the
comparable companies and other factors that could affect the public trading
value of the comparable companies and transactions to which they are being
compared.
The preparation of a fairness opinion involves various determinations as to
the most appropriate and relevant quantitative and qualitative methods of
financial analyses and the application of those methods to the particular
circumstances and, therefore, such an opinion is not readily susceptible to
summary description. Accordingly, Needham believes that its analyses must be
considered as a whole and that considering any portions of such analyses and of
the factors considered, without considering all analyses and factors, could
create a misleading or incomplete view of the process underlying its opinion. In
its analyses, Needham made numerous assumptions with respect to industry
performance, general business and economic and other matters, many of which are
beyond the control of ANDATACO or IPL. Any estimates contained in these analyses
are not necessarily indicative of actual values or predictive of future results
or values, which may be significantly more or less favorable. Additionally,
analyses relating to the values of businesses or assets do not purport to be
appraisals or necessarily reflect the prices at which businesses or assets may
actually be sold.
Pursuant to the terms of the engagement letter between Needham and IPL, IPL
has paid Needham advisory fees of $100,000 and a fee for rendering the Needham
Opinion of $150,000. None of Needham's fee is contingent upon the consummation
of the Merger. IPL has also agreed to reimburse Needham for certain of its
reasonable out-of-pocket expenses and to indemnify it against certain
liabilities relating to or arising out of services performed by Needham as
financial advisor to IPL.
Needham is a nationally recognized investment banking firm. As part of its
investment banking services, Needham is frequently engaged in the evaluation of
businesses and their securities in connection with mergers and acquisitions,
negotiated underwritings, secondary distributions of securities, private
placements and other purposes. Needham was retained by the IPL Board to act as
IPL's financial advisor in connection with the Merger based on Needham's
experience as a financial advisor in mergers and acquisitions as well as
Needham's familiarity with companies that manufacture and distribute RAID arrays
and other computer memory and/or storage devices and distribute electronic and
computer equipment components in the computer memory and storage industry. In
the normal course of its business, Needham may actively trade the equity
securities of IPL for its own account or for the account of its customers and,
therefore, may at any time hold a long or short position in such securities.
Substantial Ownership Reduction. The Merger would result in a substantial
reduction of a current IPL stockholder's ownership interest in IPL. If the
Merger is consummated, the 5,633,819 shares of IPL Stock which were outstanding
on March 22, 1997 and represented 100% of the outstanding shares of IPL would
represent approximately 23.6% of the shares of IPL outstanding immediately after
the Merger (exclusive of options, warrants and other rights to purchase IPL
Stock). Thus, for example, an IPL stockholder currently owning 4% of the
outstanding IPL Stock would own approximately 1% of the outstanding stock
following the Merger. (The Merger will, however, result in IPL significantly
increasing its consolidated revenues and assets.) Following the Merger, Mr.
Sykes will be able to control the outcome of all matters requiring a vote of
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IPL stockholders, including election of all of the directors, adoption or
amendment of certain provisions of the IPL Articles of Organization or By-laws
and approval or prevention of certain mergers or similar transactions, such as a
sale of substantially all of IPL's assets (including transactions that could
give other IPL stockholders the opportunity to receive a premium over the
then-prevailing market price for their shares). In other words, current IPL
stockholders would become minority stockholders, generally unable to control the
management and business policies of IPL.
ANDATACO's Reasons for the Merger. The ANDATACO Board and the ANDATACO
shareholders believe that the Merger is in the best interests of ANDATACO and
the ANDATACO shareholders based primarily on the following benefits to ANDATACO:
(i) ANDATACO had been in the process of transforming from a systems integrator
and distributor to a manufacturer of storage products and believed that IPL's
proven product offerings and experienced research and development and
engineering departments will complement and enhance ANDATACO's existing research
and development, engineering and manufacturing efforts; (ii) ANDATACO's
experienced marketing and sales force and national distribution network can be
effectively employed to enhance distribution of IPL's product lines; (iii) the
revenue and asset base of the combined companies will likely enhance the
combined companies' access to equity and debt capital; and (iv) because the
ANDATACO shareholders will receive shares of IPL Stock in the Merger, the Merger
will provide some degree of liquidity to the ANDATACO shareholders who, after a
period of time, will be able to sell such shares in the public market. Based on
the foregoing, ANDATACO believes that the combined entities' complementary
operations and certain personnel of IPL will play a key role in achieving
ANDATACO's strategic plans to increase the size and scope of its operations in
the future.
In light of the foregoing considerations, the ANDATACO Board and
shareholders of ANDATACO have unanimously approved the Merger, the Merger
Agreement and the transactions contemplated thereby.
Interests of Certain Persons in the Merger. Mr. Ravine is a managing
director of BI Capital, which has earned $50,000 for providing financial advice
and assistance in connection with the negotiation of the Merger and is entitled
to receive a $50,000 "success fee" upon consummation of the Merger. Mr. Ravine,
an IPL outside director, played an instrumental role in negotiating the terms of
the Merger. For a discussion of Mr. Ravine's proposed employment agreement with
ANDATACO, see "CERTAIN OTHER MATTERS RELATING TO THE MERGER -- Employment
Agreements -- Ravine Employment Agreement."
In addition, Ronald J. Gellert, Anita D. Buchanan and Eugene F. Tallone
have severance agreements with IPL which provide benefits described under
"EXECUTIVE COMPENSATION -- Executive Severance and Employment Agreements."
Effective Date. It is expected that the closing contemplated by the Merger
Agreement will take place on or about May 30, 1997 (the "Closing Date"). The
date of the filing of appropriate merger documents with the California Secretary
of State and the Delaware Secretary of State, or such later time as may be
specified therein, will be the Effective Date of the Merger. IPL and ANDATACO
will cause such merger documents to be filed and recorded as soon as practicable
on or after the satisfaction or waiver of all conditions to the Merger. It is
expected that the merger documents will be filed on the Closing Date, and will
specify an Effective Date of not later than July 31, 1997.
THE MERGER AGREEMENT
General. The detailed terms of and conditions to the consummation of the
Merger are contained in the Merger Agreement, a conformed copy of which is
attached hereto as Annex I and incorporated herein by reference. The following
discussion sets forth a description of the material terms and conditions of the
Merger Agreement and is qualified by, and made subject to, the more complete
information set forth in the Merger Agreement.
Representations, Warranties and Covenants. The Merger Agreement contains
various customary representations and warranties of IPL and ANDATACO relating
to, among other things, (i) corporate organization and similar matters; (ii)
capital structure; (iii) the authorization, execution, delivery, performance and
enforceability of the Merger Agreement; (iv) conflicts under organizational
documents, required
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consents or approvals and violations of laws; (v) documents filed by IPL with
the Securities and Exchange Commission and the accuracy of information contained
therein; (vi) the absence of certain material adverse changes in operations or
financial performance since the date of each party's most recent audited
financial statements; (vii) undisclosed liabilities; (viii) accuracy of
information supplied to the other party; (ix) litigation; (x) compliance with
applicable laws; (xi) taxes; (xii) retirement and other employee benefit plans
and matters relating to the Employee Retirement Income Security Act of 1974, as
amended; (xiii) the right to employ the intellectual property presently used;
(xiv) contracts relating to employment, consulting and benefits matters; (xv)
related party transactions; (xvi) material contracts; (xvii) environmental
matters; and (xviii) insurance coverage.
IPL and ANDATACO have agreed that, except with the prior written consent of
the other and with certain other exceptions set forth in the Merger Agreement,
prior to the consummation of the Merger each shall observe certain covenants
relating to the conduct of its business, including conducting its business in
the ordinary course and using reasonable efforts to preserve intact its current
business organization, keep available the services of its officers and
employees, maintain its relations and goodwill with all suppliers, customers,
landlords, creditors, employees and other persons having business relationships
with it and keep in effect insurance policies in effect at the date of the
Merger Agreement.
Each of IPL and ANDATACO has agreed that, except with the prior written
consent of the other and with certain other exceptions set forth in the Merger
Agreement, it will not take the following actions: (i) declare, accrue, set
aside or pay any dividend or make any other distribution in respect to any
shares of capital stock, or repurchase, redeem or otherwise reacquire any shares
of capital stock or other securities (other than the surrender of options in
connection with terminations of employment); (ii) sell, issue or authorize the
issuance of any capital stock, option or other security (except issuances upon
the exercise of outstanding options or warrants); (iii) amend or waive any of
its rights under, or authorize the acceleration of vesting under, (A) any
provision of its stock plans, (B) any provision of any agreement evidencing any
outstanding option or warrant, or (C) any provision of any restricted stock
agreement; (iv) except for the amendment of IPL's Articles of Organization
necessary to authorize the Merger Shares, amend or permit the adoption of any
amendment to its articles of organization or bylaws, or effect or permit the
adoption of any amendment to its articles of organization or bylaws, or effect
or permit itself or any of its subsidiaries to become a party to any acquisition
transaction, recapitalization, reclassification of shares, stock split, reverse
stock split or similar transaction; (v) form any subsidiary or acquire any
equity interest or other interest in any other entity; (vi) make any capital
expenditure, except for capital expenditures that, when added to all other
capital expenditures do not exceed $100,000 in the aggregate; (vii) (A) enter
into or become bound by, or permit any of the assets owned or used by it to
become bound by, any material contract or (B) amend or prematurely terminate, or
waive any material right or remedy under, any material contract; (viii) (A)
acquire, lease or license any material right or other material asset from any
other person, (B) sell or otherwise dispose of, or lease or license, any
material right or other material asset to any other person other than sales of
inventory in the ordinary course of business, except that IPL may dispose or
attempt to dispose of the assets related to its AS/400 business or (C) waive or
relinquish any right; (ix) (A) lend money to any person (other than ordinary
advances for travel and entertainment), or (B) incur or guarantee any
indebtedness in excess of $100,000, except routine borrowings in the ordinary
course of business under existing lines of credit; or (x) (A) establish, adopt
or amend any employee benefit plan, (B) pay any bonus or make any profit-sharing
or similar payment to, or increase the amount of the wages, salary, commissions,
fringe benefits or other compensation or remuneration payable to, any of its
directors, officers or employees except pursuant to agreements in effect on the
date hereof, or (C) hire any new employee whose aggregate annual compensation is
expected to exceed $60,000.
IPL and ANDATACO have each agreed to use their respective commercially
reasonable efforts to obtain all authorizations, consents and permits necessary
for the consummation of the transactions contemplated by the Merger Agreement,
to use their respective best efforts to perform and fulfill their obligations
under the Merger Agreement and to obtain the other party's approval prior to
issuance of any press release or other information to the press or any third
party with respect to the Merger Agreement or the transactions contemplated
thereby.
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Conditions of Merger. In addition to the adoption of the Merger Proposals
by the stockholders of IPL, the respective obligations of IPL and ANDATACO to
consummate the Merger are subject to the following conditions, among others,
unless waived: (i) the representations and warranties contained in the Merger
Agreement must be accurate in all material respects at the Closing Date; (ii)
all covenants and agreements required by the Merger Agreement to be performed or
complied with shall have been performed or complied with on or prior to the
Closing Date; (iii) there shall have been no material adverse change in the
business of the other party; (iv) the parties shall have received customary
legal opinions and other documents as described in the Merger Agreement; (v) IPL
shall have received letters from each ANDATACO shareholder regarding such
shareholder's investment intent regarding the Merger Shares; (vi) the parties
shall have obtained all approvals, consents and waivers required to be obtained
in connection with the performance of the Merger Agreement; (vii) the parties
shall have entered into the Escrow Agreement governing the Merger Shares to be
held in escrow; (viii) Mr. Sykes shall have executed and delivered to IPL a
noncompetition agreement; (ix) any applicable waiting period under HSR shall
have expired or terminated; (x) the parties shall have received opinions of
counsel to the effect that the Merger will be a tax-free reorganization; (xi)
the IPL Stock shall be quoted or listed on the Nasdaq Stock Market or a national
exchange; and (xiii) certain related agreements shall have become effective.
Termination. The Merger Agreement may be terminated at any time prior to
the Effective Date, whether prior to or after approval of the Merger Proposals
by IPL's stockholders as follows: (i) by mutual written consent of both parties;
(ii) by either party if the Merger shall not have been consummated by July 31,
1997 (unless the failure to consummate the Merger is attributable to a failure
on the part of the party seeking to terminate to perform any material obligation
required to be performed by such party at or prior to the Effective Date); (iii)
by either party if a court of competent jurisdiction or other governmental body
shall have issued a final and nonappealable order, decree or ruling, or shall
have taken any other action, having the effect of permanently restraining,
enjoining or otherwise prohibiting the Merger; (iv) by ANDATACO (at any time
prior to the adoption and approval of the Merger Proposals) if certain events
shall have occurred; (v) by IPL if the IPL Board withdraws its recommendation in
favor of the Merger in the exercise of its fiduciary duties to IPL stockholders
based on the advice of its legal and financial advisors; and (vi) by either
party if any of the other party's representations and warranties contained in
the Merger Agreement shall be or shall have become materially inaccurate, or if
any of the other party's covenants contained in the Merger Agreement shall have
been breached in any material respect and not cured within 30 days.
Waiver and Amendment. At any time prior to the Effective Date, (i) the
parties to the Merger Agreement may, by written agreement, waive or extend the
time for performance of any obligation under the Merger Agreement and (ii) any
term or provision of the Merger Agreement may be waived in writing by the party
entitled to the benefits thereof.
No Solicitation. IPL has agreed not to (i) solicit, initiate or encourage
discussions with any person, other than ANDATACO, relating to an Acquisition
Transaction or (ii) except to the extent required by fiduciary obligations under
applicable law as advised in writing by outside legal counsel, participate in
any negotiations regarding, or furnish to any other person information with
respect to, any effort or attempt by any other person to do or to seek any
Acquisition Transaction. IPL has also agreed to inform ANDATACO within one
business day of their receipt of any offer, proposal or inquiry relating to any
Acquisition Transaction and to provide ANDATACO with information provided to
third parties.
Termination Fee. IPL will be required to pay ANDATACO a fee of $550,000 if
the Merger Agreement is terminated (i) by IPL after the IPL Board, in compliance
with its fiduciary duties, has withdrawn its recommendation in favor of the
Merger Proposals or (ii) by ANDATACO upon the occurrence of a Triggering Event.
The term "Triggering Event" is defined in the Merger Agreement to include (i)
the withdrawal by the IPL Board of its recommendation in favor of the Merger
Proposals, (ii) the approval, endorsement or recommendation by the IPL Board of
an alternative Acquisition Transaction, (iii) the IPL Board agreeing to, or
failing to oppose, an alternative Acquisition Transaction and (iv) a failure to
hold the Meeting within 45 days after the date of this Proxy Statement.
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Escrow and Indemnity. Pursuant to the Merger Agreement, ten percent of the
total number of Merger Shares will be deposited with an escrow agent (the
"Escrow Agent"), to be disbursed by the Escrow Agent in accordance with the
Escrow Agreement. Such shares will be deducted pro rata from the shares
allocable to each former holder of ANDATACO Stock and will be available as IPL's
sole remedy for ANDATACO shareholder indemnification obligations.
To extent of the value of the escrowed Merger Shares, the former holders of
ANDATACO Stock will indemnify and hold harmless IPL from and against all losses,
liabilities, damages, deficiencies, costs or expenses, including interest and
penalties imposed or assessed by any judicial or administrative body and
reasonable attorney's fees, whether or not arising out of third party claims and
including all amounts paid in investigation, defense or settlement of the
foregoing ("Losses"), arising out of any inaccuracy in any representation or
warranty of ANDATACO or such shareholders contained in the Merger Agreement.
IPL will indemnify and hold harmless each ANDATACO shareholder against
Losses arising out of any inaccuracy in any representation or warranty made by
IPL. Such right to indemnification shall be satisfied by the issuance by IPL of
IPL Stock equal to a maximum of ten percent of the Merger Shares.
These indemnity obligations apply to claims asserted within one year of the
Closing Date by IPL or the ANDATACO shareholders.
Expenses. The Merger Agreement provides that if the Merger is not
consummated, IPL and ANDATACO will bear their respective expenses incurred in
connection with the preparation, execution and performance of the Merger
Agreement and the transactions contemplated thereby. IPL will pay all fees
relating to the resale registration of the Merger Shares and the expense of
printing this Proxy Statement. See "CERTAIN OTHER MATTERS RELATING TO THE
MERGER -- Resales of Merger Consideration; Sykes Lock-up Agreement."
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CERTAIN OTHER MATTERS RELATING TO THE MERGER
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
General. The following discussion summarizes the principal federal income
tax consequences of the Merger other than to the ANDATACO shareholders. The
discussion is based on current provisions of the Internal Revenue Code of 1986,
as amended (the "Code"), existing and proposed Treasury Regulations, current
administrative rulings of the Internal Revenue Service (the "IRS") and judicial
decisions, all of which are subject to change; any such change, which may or may
not be retroactive, could alter the tax consequences to ANDATACO's shareholders,
IPL, IPL's stockholders, Merger Sub or ANDATACO as described herein. Moreover,
this discussion does not purport to be a complete analysis of all potential tax
effects relevant to a particular IPL stockholder nor does it address the tax
consequences that may be relevant to particular categories of stockholders
subject to special treatment under certain federal income tax laws. In addition,
it does not describe any tax consequences arising under the laws of any state,
local or foreign jurisdiction. Accordingly, each IPL stockholder is urged to
consult his or her own tax advisor regarding the tax consequences of the Merger
in his or her own particular tax situation and regarding state, local and
foreign tax implications of the Merger and any tax reporting requirements of the
Merger.
Palmer & Dodge LLP, counsel to IPL, and Cooley Godward LLP, counsel to
ANDATACO, each will deliver an opinion to the effect that the description of the
federal income tax consequences of the Merger contained in this section fairly
and accurately sets forth the material federal income tax consequences of the
Merger to their respective clients and their stockholders (other than the
consequences to the ANDATACO shareholders), assuming the Merger is consummated
in accordance with the terms of the Merger Agreement. This summary reflects the
views of such respective counsel as to such matters. Both the opinions and this
summary, however, are based upon representations by the managements of IPL,
ANDATACO, the Merger Sub and the majority shareholder of ANDATACO and current
law, and assume that the Merger is carried out as described herein. If those
representations are not accurate, if changes are made to current law or if the
Merger is not carried out as described herein, the federal income tax
consequences of the Merger may vary from those described in the opinions and in
this summary. Neither this summary nor either legal opinion is binding on the
IRS, and no rulings have been or will be requested from the IRS with respect to
the Merger.
Tax Treatment of IPL and Merger Sub. In the opinion of Palmer & Dodge LLP
and Cooley Godward LLP, the Merger will constitute a reorganization within the
meaning of Section 368(a) of the Code. Accordingly, it is anticipated that
neither IPL nor Merger Sub will recognize gain or loss by reason of the Merger.
The Merger will cause an "ownership" change within the meaning of Section 382 of
the Code, resulting in the imposition of an annual limitation on the amount of
pre-merger net operating losses and built-in losses of IPL which may be used to
offset gross income of IPL after the Merger.
Tax Consequences to IPL's Stockholders. No gain or loss will be recognized
in connection with the Merger by holders of IPL Stock issued before the Merger.
Furthermore, any such holder's basis in his or her IPL Stock and the holding
period for such shares should not be effected by the Merger.
Tax Treatment of ANDATACO. Recognition of gain by ANDATACO in connection
with the Merger will be limited to recognition caused by the loss of Subchapter
S corporation status for tax purposes, but, due to estimated operating losses,
no net taxable income is expected.
In the event that the IRS were to successfully challenge the reorganization
status of the Merger, there could be significant tax consequences to the
ANDATACO shareholders, but there would not be any adverse tax consequences to
IPL, IPL's stockholders, Merger Sub or ANDATACO.
MANAGEMENT OF IPL AFTER THE MERGER
Directors. With respect to each director and nominee, information relating
to such director's name, age, the positions and offices held by him, his
principal occupation, business experience, other directorships and the year in
which he became a director of IPL can be found under "ELECTION OF DIRECTORS --
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Directors." If the Merger is consummated, however, it is expected that the
composition of the IPL Board will change as described under "ELECTION OF
DIRECTORS -- Directors."
Executive Officers. IPL's executive officers are selected by the IPL Board
at its annual meeting immediately following the annual meeting of stockholders.
Such executive officers generally hold office until the next annual meeting
unless they sooner resign or are removed from office. A table listing the name,
age and position of each current executive officer of IPL can be found under
"EXECUTIVE OFFICERS." For information regarding compensation of the executive
officers during IPL's last fiscal year, please see "EXECUTIVE COMPENSATION."
If the Merger is consummated, it is expected that the following individuals
will become executive officers of IPL: Harris Ravine, W. David Sykes and Richard
Hudzik.
Mr. Ravine is expected to become Chief Executive Officer; Mr. Sykes is
expected to become President; and Mr. Hudzik is expected to become Chief
Financial Officer. Mr. Ravine is currently an IPL director, and Mr. Sykes is
expected to become an IPL director if the Merger is consummated. Information
concerning Mr. Ravine and Mr. Sykes can be found under "ELECTION OF
DIRECTORS -- Directors."
Mr. Hudzik is 53 years old. He joined ANDATACO as Chief Financial Officer
in October 1996. From November 1990 through October 1996, Mr. Hudzik served as
Vice President and Chief Financial Officer of Autosplice, Inc., a privately held
manufacturer of printed circuit board components and related equipment. Prior to
November 1990, Mr. Hudzik served in various executive capacities with certain
manufacturing and high technology companies, including ITT and Johnson &
Johnson.
RESALES OF MERGER CONSIDERATION; SYKES LOCK-UP AGREEMENT
The shares of IPL Stock to be issued pursuant to the Merger Agreement will
not be registered under the Securities Act of 1933, as amended (the "Securities
Act"). Under the terms of the Merger Agreement, IPL has agreed to file a resale
registration statement covering the Merger Shares within 300 days of the Closing
Date. As a condition to closing, however, Mr. Sykes, will enter into a lock-up
agreement (the "Lock-up Agreement") pursuant to which he will agree not to sell
any of his shares (constituting 98.8% of the Merger Shares) for the first year
after the Closing Date and to limit sales during any three-month period during
the following four years to the greater of (i) one percent (1%) of the
outstanding shares of IPL Stock and (ii) the average weekly reported volume of
trading in IPL Stock.
NONCOMPETITION AGREEMENT
A condition to the consummation of the Merger is that IPL and Mr. Sykes
enter into a noncompetition agreement (the "Noncompetition Agreement"). Pursuant
to the terms of the Noncompetition Agreement, Mr. Sykes would receive 60 monthly
payments of $16,667 for a total of $1,000,020. In exchange for such payments,
Mr. Sykes would agree not to compete with ANDATACO, solicit customers or
employees of ANDATACO or its affiliates or disclose any confidential
information. Mr. Sykes's obligation not to compete would terminate at the
earliest of (i) five years after the Closing Date, (ii) IPL's failure to make
the payments described above or (iii) failure of IPL or ANDATACO to make
payments required under Mr. Sykes's employment agreement with ANDATACO (the
"Sykes Employment Agreement") or any replacement agreement. See "-- Employment
Agreements -- Sykes Employment Agreement."
EMPLOYMENT AGREEMENTS
Sykes Employment Agreement. Prior to the Closing Date, it is expected that
Mr. Sykes will enter into the Sykes Employment Agreement. Under the Sykes
Employment Agreement, Mr. Sykes would be hired as President and Vice Chairman of
the combined businesses. The initial term of the Sykes Employment Agreement
would end June 30, 2002, but the term would be extended for additional one-year
terms unless ANDATACO or Mr. Sykes elected not to extend it. Mr. Sykes's initial
annual base salary under the Sykes Employment Agreement would be $250,000, and
he would be eligible to receive cash bonuses up to an amount equal to 50% of Mr.
Sykes's then base salary if ANDATACO meets certain quantified objectives based
on an
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annual bonus plan approved by the IPL Board each year during the term of his
employment. Under certain circumstances, Mr. Sykes would be entitled to
substantial severance payments upon a change of control of ANDATACO. The Sykes
Employment Agreement also provides for additional benefits, including term life
insurance and a car allowance.
Ravine Employment Agreement. A condition to ANDATACO's obligation to close
the Merger is that Harris Ravine execute and deliver an employment agreement
with ANDATACO. It is anticipated that Mr. Ravine may commence employment under
such agreement with ANDATACO before the Closing Date. Under the Ravine
Employment Agreement, Mr. Ravine would be hired as Chief Executive Officer and
Chairman of ANDATACO and, after the Closing Date, IPL. The initial term of the
Ravine Employment Agreement ends June 30, 2002, but the term can be extended for
additional one-year terms unless ANDATACO or Mr. Ravine elects not to so extend.
Mr. Ravine's initial annual base salary under the Ravine Employment Agreement is
$300,000, and he will be eligible to receive cash bonuses up to an amount equal
to 50% of Mr. Ravine's then base salary if ANDATACO meets certain quantified
objectives based on an annual business plan approved by the IPL Board each year
during the term of his employment. As additional consideration for entering into
the Ravine Employment Agreement, upon consummation of the Merger, IPL would
grant Mr. Ravine an option to purchase 700,000 shares of IPL Stock at an
exercise price equal to the fair market value of IPL Stock on the date of grant.
Pursuant to the Ravine Employment Agreement, 250,000 shares of IPL Stock
underlying the option would vest monthly and ratably during the first year of
the Ravine Employment Agreement and the option would become exercisable with
respect to such shares. An additional 225,000 shares would vest (and the option
would become exercisable with respect to such shares) in four equal installments
over the next four years. The remaining 225,000 shares would vest (and the
option would become exercisable with respect to such shares) over the same four
years but only if ANDATACO met certain objectives. Under certain circumstances,
Mr. Ravine would be entitled to substantial severance payments upon a change of
control of ANDATACO. The Ravine Employment Agreement also calls for additional
benefits, including term life insurance and a car allowance.
In addition, during the pre-closing period, from the signing of the Merger
Agreement as of February 28, 1997 until the Closing Date or such earlier date as
Mr. Ravine commences employment with ANDATACO, IPL has retained the services of
Mr. Ravine at a rate of $25,000 per month to assist in matters relating to the
closing of the Merger and planning for the combination of the businesses of IPL
and ANDATACO after the Closing Date. Under the Merger Agreement ANDATACO has
agreed to reimburse IPL monthly on a nonrefundable basis for 75% of the cost of
any such compensation paid to Mr. Ravine for such services.
LISTING
The IPL Stock is currently quoted on the National Market of the Nasdaq
Stock Market. The National Association of Securities Dealers (the "NASD") has
certain requirements for continued inclusion on the Nasdaq National Market
following a change of control transaction which results in a change in an
issuer's financial structure. The NASD has determined that the Merger would
trigger such requirements and that the combined entity would fail to satisfy the
requirements for continued inclusion on the Nasdaq National Market.
Consequently, IPL has applied and IPL Stock has been approved for inclusion on
the Nasdaq SmallCap Market, effective as of the Closing Date of the Merger or
such earlier date as IPL may request. Stocks quoted on the Nasdaq SmallCap
Market often are traded less frequently than stocks quoted on the Nasdaq
National Market.
The Marketplace Rules of the NASD requires a Nasdaq National Market issuer
to obtain stockholder approval of a stock issuance which will result in a change
of control of the issuer. IPL is seeking stockholder approval of the issuance of
the Merger Shares because the issuance of such shares would result in a change
of control.
It is a condition to each party's obligation to close the Merger that the
IPL Stock be quoted or listed on the Nasdaq National Market, the Nasdaq SmallCap
Market or a national exchange. The parties could, however, waive this condition.
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<PAGE> 39
REGULATORY MATTERS
IPL and ANDATACO each filed a notification report under the
Hart-Scott-Rodino Antitrust Improvement Act of 1976, as amended ("HSR"), with
the Federal Trade Commission and the Department of Justice and have been
notified that the waiting period has been terminated without further action.
Other than the filings under HSR and the filing of appropriate merger documents
with the Secretary of State of California and the Secretary of State of
Delaware, neither IPL nor ANDATACO is aware of any governmental approval
required to effect the Merger.
ACCOUNTING TREATMENT
Although as a legal matter IPL is acquiring ANDATACO, the Merger will be
accounted for as a "purchase" of IPL by ANDATACO for accounting and financial
reporting purposes. Accordingly, ANDATACO'S historical financial statements will
become IPL's financial statements. Under the purchase method of accounting,
IPL's results of operations will be combined with those of ANDATACO from and
after the Effective Date, and IPL's specific tangible and identifiable
intangible assets and liabilities will be recorded on ANDATACO'S books at their
respective fair values at the Effective Date. A determination of the fair value
of IPL's specific tangible and identifiable intangible assets and liabilities
will be made in order to allocate the purchase price to the assets acquired and
the liabilities assumed. The portion of the value of the consideration that is
deemed to exceed the fair value of IPL's specific tangible and intangible assets
and liabilities will be reported as goodwill on the balance sheet and amortized
through charges to earnings over a five-year period following the Effective
Date. See "UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS."
OEM AGREEMENT
On February 25, 1997, IPL and ANDATACO entered into a one-year OEM
Agreement (the "OEM Agreement"). Under this arrangement, ANDATACO is a
non-exclusive reseller of certain IPL computer hardware and software products
and spare parts for such products, which it can purchase at a discount from
IPL's list prices. After entering into the OEM Agreement, IPL discontinued
direct sales, which included the termination of its direct sales force. IPL now
relies almost exclusively on ANDATACO as the primary distributor of its
products. ANDATACO has hired many of the prior IPL employees, as well as certain
representatives who had previously left IPL to work with other companies. The
OEM Agreement can be terminated by either party on thirty days' notice. If the
OEM Agreement is terminated, there can be no assurance that IPL will be able to
access alternative distribution channels and may, therefore, confront
significant difficulties marketing its products. Revenues to IPL generated from
sales to ANDATACO under the OEM Agreement totalled approximately $425,000 in the
first quarter of 1997, and there is no assurance that there will be any
substantial additional sales before the Closing Date or if the Merger is not
consummated.
IMPERIAL BANK CREDIT AGREEMENT
ANDATACO presently maintains a revolving line of credit with Imperial Bank
pursuant to which ANDATACO may borrow the lesser of $10,000,000 or a percentage
of eligible accounts receivable and inventory. It is a condition to closing the
Merger that ANDATACO have obtained all consents to the Merger as are reasonably
required to permit ANDATACO to maintain its line of credit with Imperial Bank on
terms and conditions acceptable to IPL. ANDATACO has obtained Imperial Bank's
consent to the Merger. Under the terms of the line of credit, ANDATACO is
restricted from paying dividends without the consent of the bank. See "ANDATACO
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Liquidity and Capital Resources" for a more detailed description
of the credit line. IPL and ANDATACO expect to seek to amend the line of credit
after the Merger, including amendment to provide terms that will be consistent
with termination of ANDATACO's status as a Subchapter S corporation under the
Code and its becoming a subsidiary of IPL after the Merger.
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<PAGE> 40
DESCRIPTION OF IPL STOCK
The authorized capital stock of IPL consists of 20,000,000 shares of Class
A Common Stock, $0.01 par value per share, and 2,250,000 shares of Class C
Common Stock, $0.01 par value per share. None of the Class C Common Stock is
outstanding. Each share of IPL Stock is entitled to one vote on all matters
requiring a vote of IPL stockholders and is entitled to receive such dividends,
in cash, securities or property, as may from time to time be declared by the IPL
Board. In the event of any liquidation, dissolution, or winding up of IPL,
either voluntary or involuntary, the holders of IPL Stock shall be entitled to
share ratably, according to the number of shares held by them, in all remaining
assets of IPL available for distribution.
FINANCIAL ADVISORS
Needham acted as a financial advisor to the IPL Board in connection with
the Merger. Pursuant to the terms of the letter agreement with Needham, IPL has
paid Needham $100,000 for financial advisory services and $150,000 for rendering
its opinion as to the fairness, from a financial point of view, to IPL
stockholders of the payment of the Merger Consideration by IPL. In addition, IPL
has agreed to reimburse Needham for its reasonable out-of-pocket expenses and to
indemnify Needham and certain related persons against certain liabilities,
including liabilities under the federal securities laws, relating to or arising
out of its engagement.
Please see "THE MERGER PROPOSALS -- The Merger -- Interests of Certain
Persons in the Merger" for a discussion of the services provided by, and
payments made or due, BI Capital. Mr. Ravine, an outside director of IPL who
helped negotiate the Merger Agreement, is a managing director of BI Capital.
DESCRIPTION OF IPL
The business of IPL is described in IPL's annual report to stockholders,
which is attached hereto as Annex III and incorporated herein by reference.
IPL MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
IPL management's discussion and analysis of financial condition and results
of operations is included in IPL's annual report to stockholders, which is
attached hereto as Annex III and incorporated herein by reference.
DESCRIPTION OF ANDATACO
GENERAL
ANDATACO, founded in 1986 and headquartered in California, is a computer
storage provider for UNIX and Windows NT environments. ANDATACO designs high
availability storage and backup solutions based on its proprietary intelligent
enclosure technology. ANDATACO distributes its own products, and products from
other manufacturers, through a network of 20 sales offices in the United States
and through business affiliates in Europe, Asia, Latin America, Canada and
Australia. The principal executive offices of ANDATACO, a California
corporation, are located at 10140 Mesa Rim Road, San Diego, California 92121,
and its telephone number at such offices is (619) 453-9191. As of the date of
this Proxy Statement, all of the outstanding shares of ANDATACO Stock were held
by two shareholders.
BUSINESS
ANDATACO provides storage solutions for UNIX and Windows NT environments,
with a specialization in high availability enterprise storage and back-up
solutions for IT departments with business-critical data to manage. The market
size for the RAID and non-RAID disk storage market in 1996 was recently
estimated
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<PAGE> 41
to be approximately $26.8 billion by International Data Corporation, an
independent computer industry research company. During fiscal year 1996,
ANDATACO had revenues of approximately $100 million.
ANDATACO's product line consists of products obtained from third parties as
well as products developed by ANDATACO in-house. Third-party products marketed
by ANDATACO include add-in memory, add-in SCSI host boards, networking products
(including routers, bridges and Ethernet switches) and backup and restore
software products. ANDATACO's third-party suppliers include Clarion, a division
of Data General Corporation, Hewlett Packard, Axil Computer Company, Dataram,
Kingston, 3Com, Bay Networks, and Legato, as well as other computer hardware and
software manufacturers. In addition, ANDATACO offers total UNIX-based solutions
including workstations, tape libraries, networking and communication products
and computer peripherals.
ANDATACO also has developed a line of in-house products. ANDATACO's first
in-house product line, GigaRAID, was introduced to the market in the third
quarter of fiscal year 1996. The GigaRAID product line is a family of RAID and
non-RAID disk and tape storage systems that are combined with ANDATACO's
proprietary Enterprise Storage Packaging (ESP) to create an array of storage
solutions. "RAID" is an acronym for Redundant Array Independent Devices and is a
method of storing data on disk/tape drives that is controlled either by software
in the host computer or by a hardware-based controller board that either
physically resides in the host computer or inside the storage system itself. In
contrast, non-RAID storage systems do not use any of the foregoing RAID storage
system methodologies. GigaRAID differs from other RAID and non-RAID systems
primarily in that it incorporates ANDATACO's ESP, which contains features that
provide for (i) hot swappable disk and tape cannisters, (ii) error reporting of
critical components, such as temperature, power and fan health and hard and soft
disk/tape error rates, all of which can be reported through visual, audible and
electronic medium, (iii) the ability to support most types of older and newer
generation SCSI disk/tape interfaces, such as Ultra SCSI, (iv) cableless
architecture, and (v) the ability to support drives that operate at 10,000 RPMs.
The GigaRAID product line includes: GigaRAID 3000, a desktop disk/tape based
non-RAID storage system; GigaRAID 8000, a rackmount or deskside tower disk/tape
based non-RAID storage system; and GigaRAID/SA, a rackmount or deskside tower
disk based SCSI RAID system. ANDATACO also markets its RAPID Tape product, one
of the industry's first tape-based RAID products, which permits the operation of
two to five tape drives in parallel to provide enhanced tape backup and restore
speed and reliability. ANDATACO is currently developing new versions of its
hardware-based GigaRAID and RAPID Tape products. In addition, ANDATACO plans on
selling versions of its ESP as a stand alone product to other industry OEM's
systems integrators and VARs.
With ANDATACO's recent introduction of its GigaRAID product line, it plans
to continue to design and develop in-house products. Although ANDATACO intends
to continue to aggressively pursue the sale of value added products, ANDATACO
intends to focus increased resources on design and development of in-house
products in the future.
ANDATACO provides an in-house technical support staff, pre- and post-sales
support and numerous warranty and service programs and is known for its superior
customer service. ANDATACO's mission is to design develop and market high
availability, business-critical storage solutions that assist companies in
fulfilling their mission statements. ANDATACO is committed to delivering
customer satisfaction, state-of-the-art technology and quality products and
services.
Headquartered in San Diego, California, ANDATACO maintains 20 offices
nationwide. ANDATACO markets its products directly through approximately 54
sales engineers in the United States and through business affiliates in Europe,
Asia, Latin America, Canada and Australia. Target markets include Fortune 1000
companies, the U.S. Government and the financial, oil and gas, and entertainment
industries. ANDATACO continues to be led by W. David Sykes, who founded the
company in 1986.
PROPERTIES
Although ANDATACO does not own any real property, it is party to several
leases, including one covering its corporate headquarters described below.
Leases for ANDATACO's office space contain typical
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<PAGE> 42
commercial lease provisions including renewal options, rent escalators and
tenant responsibility for operating expenses. ANDATACO has entered into a
ten-year lease with Syko Properties, Inc., a corporation wholly-owned by W.
David Sykes, dated January 1, 1993 (the "Lease"), for 42,384 square feet of
industrial office space located at 10140 Mesa Rim Road, San Diego, California
92121. This lease commenced on April 1, 1993 and expires on March 31, 2003.
ANDATACO has four five-year options to renew the Lease at market rates. The
current monthly rental payment under the Lease is $27,549.60.
EMPLOYEES
As of December 31, 1996, ANDATACO had 184 employees; 98 were employed in
sales and distribution, 28 were employed in engineering and manufacturing, 23
were employed in accounting and finance and 35 were employed in executive
management and administration. None of ANDATACO's employees is covered by a
collective bargaining agreement. ANDATACO believes its relationship with its
employees is good. ANDATACO offers most of its employees a range of benefits,
including a profit sharing/401(k) plan and life, health and dental insurance.
LEGAL MATTERS
ANDATACO from time to time is involved in litigation in the ordinary course
of business, but is not a party to any lawsuit or proceeding which, in the
opinion of its management, is likely to have a material adverse effect on its
financial condition or results of operations.
ANDATACO MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
ANDATACO designs, markets and services high-availability, business-critical
storage and backup solutions for UNIX and Windows NT environments. ANDATACO
delivers service and support from 20 sales and service offices across the United
States, through worldwide business affiliates in Europe, Asia, Latin America,
Canada, and Australia, and through the World-Wide Web.
ANDATACO was founded in 1986 in San Diego by W. David Sykes as a
value-added reseller. A research and development effort was initiated early in
fiscal 1996, which resulted in ANDATACO manufacturing and selling its own
Enterprise Storage Packaging ("ESP") intelligent cabinet technology product
line. The new storage packaging enabled ANDATACO to develop a new brand of RAID
and "RAIDready" storage systems ("GigaRAID") that management believes meet or
exceed customer performance requirements. ANDATACO also continues to sell value
added products as required to meet customer requirements.
Sales consist of products and services to customers and revenue is
recognized upon shipment of products to customers. ANDATACO also sells advance
replacement warranty contracts and recognizes revenue on these sales over the
life of the contracts. Operating expenses consists mainly of payroll,
commissions, advertising, occupancy and research and development costs.
RESULTS OF OPERATIONS
Quarters Ended January 31, 1997 and 1996. Revenues remained essentially
the same in both quarters, with revenues of $25,497,000 for the quarter ended
January 31, 1997 and revenues of $25,551,000 for the quarter ended January 31,
1996. The source of revenues has continued to change with ANDATACO's in-house
designed GigaRAID products representing a higher percentage of revenues in the
quarter ended January 31, 1997.
Gross profit increased to 23.5% in the quarter ended January 31, 1997 from
20.4% in the quarter ended January 31, 1996. This was due primarily to higher
margins on the GigaRAID product line as well as a reduction in product costs.
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<PAGE> 43
Total operating expenses increased to $5,757,000 (22.6% of revenues) in the
quarter ended January 31, 1997 from $5,443,000 (21.3% of revenues) in the
quarter ended January 31, 1996. Additional selling expenses were incurred in the
first quarter ended January 31, 1997 for additional sales people.
Years Ended October 31, 1996 and 1995. ANDATACO's revenues were
$99,733,000 for the year ended October 31, 1996 ("FY 1996") and $100,048,000 for
the year ended October 31, 1995 ("FY 1995"), representing a decrease of
$315,000. While revenues remained relatively constant from year to year, during
the later half of the year ANDATACO replaced certain value added sales with
sales of its in-house designed GigaRAID product line. Consequently, the source
of revenues began to change slightly with ANDATACO designed products being sold
for the first time during the second half of the year. ANDATACO introduced its
new GigaRAID product line in the third quarter of FY 1996. The immaterial
decrease in revenues between FY 1995 and FY 1996 was due to a slightly longer
introduction period for the GigaRAID product line than ANDATACO had originally
anticipated. Revenues from sales of ANDATACO's GigaRAID products were only $5.7
million during FY 1996, while revenues from ANDATACO's value added products
accounted for $94.0 million during the same period.
Gross profit declined from $20,972,000 (21.0% of revenues) in FY 1995 to
$19,358,000 (19.4% of revenues) in FY 1996. This decrease was due primarily to
the additional costs incurred to establish a manufacturing operation to produce
ANDATACO's new ESP product line.
Total operating expenses were $18,174,000 (18.2% of revenues) in FY 1995
and $18,488,888 (18.5% or revenues) in FY 1996. Beginning in FY 1996, a research
effort was established to develop new products, such as ANDATACO's ESP product
line. This increased expenses by $919,000, or 9% of revenues. Salary expenses
were lowered by 1.2% of revenue mainly due to a decrease in an officer's
compensation in FY 1996.
Interest expenses were higher in FY 1996 due to higher borrowing levels
than in FY 1995.
Years Ended October 31, 1995 and 1994. ANDATACO's revenues were
$100,048,000 for FY 1995 and $83,600,000 for the year ended October 31, 1994
("FY 1994") representing an increase of 20.7%. This increase was primarily the
result of a larger sales department and better name recognition in the storage
industry.
Gross profit increased from $15,567,000 (18.6% of revenues) in FY 1994 to
$20,972,000 (21.0% of revenues) in FY 1995. This was due primarily to an
increase in the demand for and sale of UNIX storage products.
Total operating expenses increased proportionately with revenue increases.
Interest expenses were higher in FY 1995 than in FY 1994 due to higher
interest rates in FY 1995.
INCOME TAXES
Historically, ANDATACO has elected to be taxed under Subchapter S of the
Code, and therefore all income taxes (with the exception of a mandatory one and
one-half percent California State tax) have been paid directly by its
shareholder. Upon consummation of the Merger, ANDATACO will be taxed under
Subchapter C of the Code, and its earnings will then be subject to federal and
state income taxes.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, ANDATACO has financed its operations primarily through
a combination of cash generated from operations and bank borrowings.
ANDATACO has a credit facility which permits borrowings of the lesser of
$10,000,000 or a percentage of eligible accounts receivable and inventory and
which expires February 15, 1998. Advances under this credit facility bear
interest at the bank's prime rate plus 75 basis points. This line of credit is
secured by substantially all of the assets of ANDATACO as well as the personal
guarantee of Mr. Sykes. It contains customary covenants and restrictions. As of
January 31, 1997, ANDATACO was in compliance with all such covenants
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and restrictions; continuation of the facility after the Effective Date,
however, will require the consent of the bank. Borrowings under the line of
credit were $9,000,000 at January 31, 1997.
Capital spending for the year ended October 31, 1996 was $770,000. Capital
spending for the quarter ended January 31, 1997 was $121,000.
As of October 31, 1996 ANDATACO's principal commitments consisted of
obligations under operating leases aggregating $2,676,000.
Management believes that ANDATACO's cash and availability under the line of
credit are sufficient to meet the operating requirements of its existing
business for a period of at least twelve months.
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ELECTION OF DIRECTORS
DIRECTORS
Directors are to be elected at the Meeting. IPL's management recommends
that the holders of IPL Stock vote to fix the number of directors at four for
the coming year and to elect Ronald J. Gellert, Stephen J. Ippolito, Cornelius
P. McMullan and Harris Ravine as directors. All the nominees for election are
presently serving as members of the IPL Board. If any nominee should become
unavailable for election, the persons voting the accompanying proxy may in their
discretion vote for a substitute. If the Merger is not consummated, the
directors elected at the Meeting will hold office until the next annual meeting
and until their successors are elected and qualified. If the Merger is
consummated, it is expected that (1) Mr. Gellert and Mr. Ippolito will resign
and (2) the remaining directors will elect up to two new directors, who will
include Mr. Sykes and an additional independent director to be selected
subsequently. Under the terms of the Merger Agreement, Mr. Sykes is obligated to
cause the election of at least two independent directors during the year
following the Effective Date. Furthermore, because IPL expects that the IPL
Stock will be quoted on the Nasdaq SmallCap Market, IPL expects to be required
to have at least two independent directors in order to maintain such status
under Nasdaq's proposed rules for that market.
Directors elected at the Meeting will be elected by a plurality of the
votes properly cast at the Meeting. Abstentions, votes withheld and broker
non-votes will not be treated as votes cast for this purpose.
The following table contains certain information about the nominees for
directors and each other person whose term of office as a director will continue
after the Meeting.
<TABLE>
<CAPTION>
DIRECTOR
NAME AGE SINCE PRINCIPAL OCCUPATION DURING LAST FIVE YEARS
- ------------------------- --- -------- ------------------------------------------------------
<S> <C> <C> <C>
Ronald J. Gellert........ 50 1995 President, Chief Executive Officer and Director of IPL
since December 1995. Previously 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.
Stephen J. Ippolito...... 50 1973 Chairman of the Board of IPL and Chief Engineer since
1985; acting President of IPL from September to
December 1995.
Cornelius P. McMullan.... 57 1995 Executive Vice President of VMARK Software, Inc., a
software company, responsible for sales since January
1997. Independent technology consultant from January
to December 1996. President and Chief Executive
Officer of Sequoia Systems, Inc., a computing
technology company, from December 1992 to January
1996. Prior to that, Mr. McMullan worked for 13 years
at Prime Computer in a number of national and
international sales and management positions, most
recently as President, Commercial Systems.
Harris Ravine............ 54 1995 Managing Director of BI Capital, Ltd., and Technology
Investment Advisor for the Broe Companies in Denver,
Colorado. From 1985 to 1994, Mr. Ravine held senior
executive positions with Storage Technology
Corporation, most recently as Executive Vice
President; Chief Administrative Officer and Group
Officer for midrange and UNIX applications. Mr. Ravine
currently sits on the Boards of Amplicon Financial,
Inc., a publicly-held financial services company, and
two privately-held technology companies.
</TABLE>
W. DAVID SYKES
Mr. Sykes, who is expected to become a director if the Merger is
consummated, is 40 years old. He founded ANDATACO in November 1986 and has
served as its President and Chief Executive Officer since inception. Prior to
November 1986, Mr. Sykes served as Vice President of Sales at Western Scientific
Marketing, Inc. and was employed in the sales department of Group Three
Electronics, a peripherals company.
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BOARD MEETINGS AND COMMITTEES
During the fiscal year ended December 31, 1996, the IPL Board held eight
meetings. All directors who are nominees for reelection attended at least 75% of
the meetings of the IPL Board, and of the committees of the IPL Board on which
they served, held during the period for which they served.
IPL has standing Audit, Compensation and Stock Option Committees of the IPL
Board but does not have a Nominating Committee or any other committee performing
a similar function. The Audit Committee, which consisted of Mr. Ravine and Mr.
McMullan, met twice in 1996. The Compensation Committee, which during 1996
consisted of Mr. Ravine and Jeanne Sullivan, a former director, until the 1996
Annual Meeting, and thereafter consisted of Mr. Ravine and Mr. McMullan, held
three meetings in 1996.
DIRECTOR COMPENSATION
Each director who is not an employee of IPL receives a meeting fee of
$3,000 for each meeting of the IPL Board which he attends in person and a
meeting fee of $1,000 for each meeting of the Audit Committee of the IPL Board
which he attends in person as a member of such committee. No additional fees are
payable for any meeting of any committee of the IPL Board which is held in
connection with a meeting of the IPL Board or for any conference call meeting of
the IPL Board or any committee of the IPL Board. In addition, all of the
directors who are not employees of IPL are eligible to participate in the 1993
Director Stock Option Plan. Under the plan, such directors are automatically
granted initial options to purchase 10,000 shares of IPL Stock upon election as
a director or upon any change in such director's status which makes him so
eligible (e.g., termination of his employment with IPL while he remains a
director), which option have an exercise price equal to the fair market value of
the IPL Stock on the date of such election. Options granted under this plan are
exercisable with respect to 2,000 shares as of the first annual meeting of
shareholders held after such election if and only if the option holder is a
member of the IPL Board at the opening of business on that date, and will become
exercisable with respect to an additional 2,000 shares in the same manner at
each subsequent annual meeting. Furthermore, an additional option for 2,000
shares is automatically granted upon annual reelection as a director, which
option will become exercisable at the commencement of business on the first
annual meeting thereafter with respect to which the option holder does not have
any options issued under this plan becoming exercisable (typically the annual
meeting five years thereafter), if and only if the option holder is a member of
the IPL Board at the opening of business on the date of such annual meeting.
CONSULTING AGREEMENTS WITH DIRECTORS
During the fourth quarter of 1996 IPL entered into consulting agreements
with each of Mr. McMullan and Mr. Ravine for them to provide consulting services
to IPL in addition to their service as directors of IPL. Mr. McMullan was
retained to assist senior management in formulating strategy and tactics for
distribution of IPL's products, including analysis of alternative distribution
channels in different markets and maximization of the competitive
differentiation of its products, as well as assistance in identifying and
contacting potential corporate distribution partners and participation in
meetings with their representatives. Mr. Ravine was retained to assist senior
management of IPL in formulating IPL's strategy and tactics for obtaining
strategic partners and financing alternatives for any such strategic
initiatives, as well as assistance in identifying and contacting potential
strategic partners and sources of financing and participation in meetings with
their representatives. Under these agreements, Mr. McMullan was paid a $10,000
retainer for ten days of service through the 90-day period ending December 31,
1996 and a retainer of $20,000 is payable to Mr. Ravine for up to twenty days of
service through the same period. In addition, they each received a nonstatutory
option to purchase 25,000 shares of IPL Stock which vested ratably over the
period of their service.
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EXECUTIVE OFFICERS
Listed below are the names and ages of all executive officers of IPL as of
March 1, 1997 and all positions and offices with IPL held by each such person.
Officers are elected annually by the IPL Board 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.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------- --- ---------------------------------------------------------
<S> <C> <C>
Ronald J. Gellert............ 50 President, Chief Executive Officer, Director
Anita D. Buchanan............ 54 Vice President of Marketing
Stephen J. Ippolito.......... 50 Chairman of the Board, Chief Engineer, Director
Eugene F. Tallone............ 57 Vice President of Finance, Treasurer, Chief Financial
Officer
</TABLE>
Mr. Gellert joined IPL as its President and Chief Executive Officer and as
a Director in December 1995. Prior to joining IPL, Mr. Gellert held various
senior management positions with Sequoia Systems, Inc., a computing technology
company, most recently as Vice President/General Manager, Systems Business Unit.
Ms. Buchanan joined IPL in 1991 as Director of Corporate Communications and
Investor Relations, and was named Vice President of Marketing in October 1995.
Prior to joining IPL, 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. Ippolito has been Chairman of the Board of IPL and Chief Engineer since
1985 and served as the Acting Chief Executive Officer of IPL from September to
December 1995. Mr. Ippolito also served as President of IPL until September 1985
and Treasurer until 1989. If the Merger is consummated, Mr. Ippolito expects to
resign as a full-time employee of IPL, but he may continue to be a consultant to
the combined business on a part-time basis.
Mr. Tallone joined IPL in August 1989 as Vice President of Finance,
Treasurer and Chief Financial Officer. Prior to joining IPL, Mr. Tallone served
as Vice President, Treasure and Chief Financial Officer for Genome Therapeutics
Corp., a biotechnology company. Mr. Tallone has previously held senior
management positions with Millipore Corporation, G.D. Searle & Co., National
Industries and Stewart Warner Corporation.
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<PAGE> 48
EXECUTIVE COMPENSATION
The Compensation Committee Report On Executive Compensation set forth below
describes the components of IPL's direct compensation program and the policies
used in implementing it. To provide a context for considering that information,
the following graph shows the cumulative total shareholder return on IPL Stock
on a yearly basis over the five-year period ended December 31, 1996, and
compares this return with that of the CRSP Total Return Index for the Nasdaq
National Market and the CRSP Total Return Industry Index for Nasdaq Computer
Manufacturer Stocks.
COMPARISON OF FIVE YEAR(1) CUMULATIVE TOTAL RETURN(2) AMONG
IPL SYSTEMS, INC., THE CRSP TOTAL RETURN INDEX FOR THE NASDAQ NATIONAL MARKET
AND THE CRSP TOTAL RETURN INDUSTRY INDEX FOR NASDAQ COMPUTER MANUFACTURER STOCKS
<TABLE>
<CAPTION>
CRSP TOTAL RETURN CRSP TOTAL RETURN
INDEX FOR THE INDEX FOR THE
NASDAQ STOCK NASDAQ COMPUTER
MEASUREMENT PERIOD MARKET (U.S. & MANUFACTURER
(FISCAL YEAR COVERED) IPL SYSTMS, INC. FOREIGN) STOCKS
<S> <C> <C> <C>
1991 100.00 100.00 100.00
1992 55.00 116.00 134.00
1993 42.00 134.00 127.00
1994 12.00 131.00 140.00
1995 15.00 185.00 220.00
1996 9.00 227.00 296.00
</TABLE>
- ---------------
(1) Fiscal year ended December 31.
(2) Total return assumes reinvestment of dividends.
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<PAGE> 49
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee (the "Compensation Committee") of the IPL Board
evaluates information supplied by management and makes recommendations to the
IPL Board, which determines IPL's compensation program for all executive
officers of IPL, including the Chief Executive Officer and the other executive
officers named in the Summary Compensation Table set forth below. In addition,
the Compensation Committee administers IPL's equity incentive plans. The
Compensation Committee during 1996 consisted of Mr. Ravine and Jeanne Sullivan,
a former director, until the 1996 Annual Meeting, and thereafter consisted of
Mr. Ravine and Mr. McMullan.
EXECUTIVE COMPENSATION POLICIES
IPL's executive compensation policy is designed to attract, retain and
reward executive officers who contribute to the long-term success of IPL, by
maintaining a competitive salary structure as compared with other computer
technology companies and by aligning compensation with the achievement of
business objectives and individual performance objectives. Members of the
Compensation Committee are familiar with the compensation practices of a number
of companies in the field of computer technology and use published compensation
surveys to assist their deliberations. Ultimately, however, the Compensation
Committee's compensation determinations are subjective.
IPL's executive compensation package is composed of three elements: base
salary, cash bonuses based on achievement of business objectives and individual
performance objectives, and initial and other periodic and special grants of
stock options under IPL's equity incentive plans.
Base Salary. In 1996 base salaries for executive officers other than the
CEO were set at competitive levels based primarily on the recommendation of the
CEO and assisted by the Compensation Committee's analysis of published
compensation surveys reflecting compensation data for computer technology
companies. Annual adjustments were made to maintain base salaries at levels
competitive with comparable companies and to maintain an equitable relationship
between the base salaries of executive officers and overall merit increases for
IPL's other employees. In the case of any executive officer joining IPL, base
salary was also determined as one component of a total compensation package that
had to be competitive with compensation granted by the executive's prior
employer and/or other opportunities that might be available to the executive.
Incentive Bonus. The amount of the bonus component in the total
compensation plan for executive officers is established at the beginning of each
year (or upon employment, in the case of newly hired executives). The percentage
of potential total direct cash compensation that this component represents
varies for each officer, and for executive officers other than the CEO it is
based on the recommendation of the CEO and the Compensation Committee's
assessment of incentives in comparable positions in other companies. In 1996
each quarter's bonus component was only payable if IPL reported a pre-tax profit
for the quarter, and 50% of each executive officer's bonus component was based
on IPL's broader corporate performance against its financial plan for revenues
and/or results of operations. The other half of each executive officer's bonus
was based on performance against business objectives related to the individual
executive officer's responsibilities, including quantified objectives and, in
certain cases, other management objectives that were expected to provide future
competitive advantage for IPL. Examples of such individualized objectives
included development of sales and service channels, introduction and sales of
new products and programs, and management of manufacturing and financial
resources. For all executive officers other than the CEO, the quantified
business objectives were determined on a quarterly basis by the CEO.
In July 1996 the Compensation Committee approved an amendment to the bonus
plan for executive officers to provide for a draw equal to 50% of each
executive's bonus plan for the remaining two months of the third quarter and for
the full fourth quarter of 1996. For each quarter this draw was applied to
amounts due for any bonus actually earned in that quarter, and if an executive
resigned from employment with IPL at any time before 1997, all amounts paid to
the executive under this program that were not applied to bonus actually earned
were to be recoverable by IPL.
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<PAGE> 50
For IPL's executive officers other than the CEO the 1996 combined bonus
targets represented from 38% to 57% of base salary, with 50% of the bonus target
being payable based on corporate performance and the remainder based on the
individualized bonus targets. IPL only achieved its quarterly corporate
performance targets in the first quarter of 1996. The bonuses actually paid to
IPL's executive officers other than the CEO during the year represented from 16%
to 25% of total cash compensation consisting of base salary and bonus.
Stock Options. Initial stock option awards for executive officers are
individually determined at or prior to employment at levels which are designed
to attract qualified executives and in certain cases to be competitive with
options granted by their prior employers. Employees from within IPL who are
promoted to positions as executive officers typically receive additional option
grants to bring their total option grants up to the level that would have been
granted to a person hired for such executive officer position from outside IPL.
For additional information regarding options awards, see the compensation tables
following this report.
COMPENSATION OF CHIEF EXECUTIVE OFFICER
The CEO's base salary and annual incentive bonus for 1996 were set by the
Compensation Committee based upon the same policies and criteria used for other
executive officers. In setting the base salary for Mr. Gellert for 1996, the
Compensation Committee considered industry reports as well as compensation data
compiled by members of the Compensation Committee.
In 1996 Mr. Gellert's base salary was determined based primarily on the
salary IPL paid for that position in 1995. His bonus was targeted at 50% of his
base salary if 100% of the bonus targets were achieved, with a maximum bonus of
100% of his base salary. Portions of his quarterly bonus were to be payable
based on achieving pre-tax profit, cash plan and international sales targets
based on IPL's annual financial plan. Like the other executive officers, Mr.
Gellert's quarterly bonus was initially subject to achieving pre-tax
profitability, but in July 1996 he was given the same draw against his bonus for
the remainder of 1996 as was provided to the other executive officers of IPL as
described above.
The Compensation Committee at its meeting in July 1996 determined that the
strategic planning process for IPL had been substantially completed to the
satisfaction of the Committee and granted Mr. Gellert a further option with
respect to an additional 25,000 shares, vesting over four years, in satisfaction
of the terms of his employment agreement when he joined IPL in December 1995.
The use of base salary, incentive awards and stock option grants in
accordance with the above described policies has resulted in a compensation
program that the Compensation Committee believes is fair, competitive and in the
best interests of the IPL stockholders.
By the Compensation Committee,
Harris Ravine (Chair)
Cornelius P. McMullan
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<PAGE> 51
EXECUTIVE COMPENSATION TABLES
The following tables set forth certain compensation information for the
individuals who served as the Chief Executive Officer of IPL at any time during
1996 and each of the three other most highly compensated executive officers of
IPL who earned at least $100,000 in total annual salary and bonus in 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
-------------------------------- -------------
OTHER ANNUAL SECURITIES ALL OTHER
NAME AND SALARY BONUS COMPENSATION UNDERLYING COMPENSATION
PRINCIPAL POSITION YEAR ($) ($) ($) OPTIONS (#) ($)(1)
- ------------------------------- ---- ------- ------ ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Ronald J. Gellert.............. 1996 186,010 47,283 1,715(2) 25,000 448
President and Chief 1995(4) 14,231 0 0 115,000 30
Executive Officer(3)
Anita D. Buchanan.............. 1996 105,808 20,175 0 15,000 284
Vice
President -- Marketing(5).. 1995 90,950 13,851 0 15,000 127
1994 90,950 11,045 0 5,000(6) 227
Stephen J. Ippolito............ 1996 132,673 28,842 0 15,000 337
Chairman and Chief 1995 179,509 36,037 0 0 243
Engineer 1994 175,000 64,114 0 35,000(6) 430
Eugene F. Tallone.............. 1996 119,911 37,989 0 15,000 311
Vice President -- Finance and 1995 118,996 65,704 0 0 161
Chief Financial Officer 1994 111,000 69,871 0 18,000(6) 550
</TABLE>
- ---------------
(1) The reported amounts consist of premiums paid by IPL on behalf of the named
executive officers for life insurance benefits.
(2) This amount represents the premium on a personal life insurance policy that
IPL paid pursuant to Mr. Gellert's employment contract.
(3) Mr. Gellert has served as President and Chief Executive Officer since
joining IPL in December 1995.
(4) Includes compensation for only the portion of 1995 during which Mr. Gellert
was employed by IPL. Under the terms of Mr. Gellert's employment agreement,
his annual base salary is $185,000.
(5) Ms. Buchanan has served as an executive officer of IPL since October 1995;
previously, she had been an employee.
(6) Represents shares subject to options granted in 1993 or earlier which are
deemed to have been regranted in 1994 due to the repricing to market value
at December 29, 1994.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL OPTIONS POTENTIAL
------------------------------------------------------ REALIZABLE VALUE
NUMBER OF AT ASSUMED ANNUAL
SECURITIES % OF TOTAL RATES OF STOCK
UNDERLYING OPTIONS GRANTED EXERCISE OR PRICE APPRECIATION
OPTIONS TO EMPLOYEES BASE PRICE EXPIRATION FOR OPTION TERM(1)
GRANTED(#) IN FISCAL 1996 ($/SHARE) DATE(2) 5%($) 10%($)
--------- --------------- ----------- ---------- ----- ------
<S> <C> <C> <C> <C> <C> <C>
Ronald J. Gellert.............. 25,000 12.9% $2.50 7/24/02 8,693 31,614
Anita D. Buchanan.............. 15,000 7.8% $2.50 7/24/02 5,216 18,968
Stephen J. Ippolito............ 15,000 7.8% $2.50 7/24/02 5,216 18,968
Eugene F. Tallone.............. 15,000 7.8% $2.50 7/24/02 5,216 18,968
</TABLE>
- ---------------
(1) The dollar amounts under these columns are the result of calculations at the
5% and 10% rates set by the Securities and Exchange Commission and,
therefore, are not intended to forecast possible future appreciation, if
any, in the price of IPL Stock. No gain to the optionees is possible without
an increase in price of IPL Stock, which will benefit all shareholders
proportionately. In order to realize the potential values set forth in the
5% and 10% columns of this table, the per share price of IPL Stock would be
have to be approximately 14% and 50% above the exercise price, or
approximately $2.85 and $3.76 for options with a $2.50 exercise price.
(2) These dates reflect the sixth anniversary of the date of grant.
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<PAGE> 52
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS/SARS AT IN-THE-MONEY OPTIONS/SARS
SHARES ACQUIRED VALUE FISCAL YEAR-END (#) AT FISCAL YEAR-END ($)(1)
ON EXERCISE REALIZED EXERCISABLE/ EXERCISABLE/
NAME (#) ($) UNEXERCISABLE UNEXERCISABLE
- ------------------------------ --------------- -------- --------------------- -------------------------
<S> <C> <C> <C> <C>
Ronald J. Gellert............. 0 0 23,000/117,000 0/0
Anita D. Buchanan............. 0 0 4,000/29,000 0/0
Stephen J. Ippolito........... 0 0 35,000/15,000 0/0
Eugene F. Tallone............. 0 0 22,000 /15,000 0/0
</TABLE>
- ---------------
(1) Based on the difference between the option exercise price and the fair
market value of the underlying IPL Stock as of December 31, 1996, which for
this purpose is the reported last sale price of $1.813 on Tuesday, December
31, 1996.
EXECUTIVE SEVERANCE AND EMPLOYMENT AGREEMENTS
Mr. Gellert, Ms. Buchanan and Mr. Tallone each has an Executive Severance
Agreement (a "Severance Agreement") which provides that they will be entitled to
payments under certain circumstances following a change in control of IPL (as
defined below). The Severance Agreements were for an initial two-year term
expiring December 31, 1995, and are subject to automatic renewal for successive
one-year terms unless prior written notice of nonrenewal is given. The Severance
Agreements provide that in the event an executive officer's employment is
terminated by IPL, other than for cause (as defined below) or by the executive
for good reason (as defined below) following a change in control (as defined
below), IPL will make a lump sum severance payment to the executive officer of
up to one year's salary and one year's potential bonus based on prior
achievement. The potential bonus is the greatest of (i) the average of the
executive's last two annual bonuses and (ii) the most recent annual bonus, in
each case calculated on an annualized basis. Upon such termination, the
Severance Agreements also provide for (i) participation in the life, accident
and health insurance plans of IPL for such period except to the extent such
benefits are provided by a subsequent employer, (ii) in certain circumstances,
legal costs and relocation expenses associated with such termination, and (iii)
in the case of Mr. Gellert, acceleration of vesting of his options. The
Severance Agreements only require that IPL pay those legal expenses, if any,
incurred in connection with the executive's termination after a change in
control of IPL and (i) contesting or disputing the executive's termination, (ii)
seeking to obtain or enforce any right under the Severance Agreement or (iii)
defending any tax audit or proceeding regarding treatment of any payment or
benefit under the Severance Agreement as an "excess parachute payment". The
Severance Agreements also only require that IPL pay relocation expenses to the
extent the executive moves in pursuit of other business opportunities within one
year of termination and is not reimbursed by another employer.
Each Severance Agreement generally defines change in control, termination
of employment for cause and good reason as follows, which definitions are
qualified in their entirety by the full text of the agreement filed as Exhibit
10.6 to IPL's Amendment No. 1 to and Restatement of Annual Report on Form 10-K/A
for the year ended December 31, 1996.
"Change in control" means a change in control of IPL of a nature that would
be required to be reported in response to Item 6(e) of Schedule 14A of
Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"); provided, that, without limitation, such a change in
control shall be deemed to have occurred if: (i) any person or group of
affiliates or associates has acquired, acquires, or obtains the rights to
acquire, beneficial ownership (as defined in Rule 13d-1 under the Exchange Act),
directly or indirectly, of securities representing 30% or more of the combined
voting power of IPL's then outstanding securities; (ii) during any period of
twenty-four (24) consecutive months, individuals who at the beginning of such
period constitute the Board and any new director whose election by the Board or
nomination for election by the stockholders of IPL was approved by a vote of at
least two-thirds ( 2/3) of the directors then
44
<PAGE> 53
still in office who either were directors at the beginning of such period or
whose election or nomination for election was previously so approved, cease to
constitute a majority of the Board; or (iii) the stockholders of IPL approve a
merger of IPL with any other corporation, other than (A) a merger which would
result in the voting securities of IPL outstanding immediately prior to such
merger continuing to represent at least 50% of the combined voting securities of
IPL or such surviving entity outstanding immediately after such merger or (B) a
merger effected to implement a recapitalization of IPL (or similar transaction)
in which no person acquires 30% or more of the combined voting power of IPL's
then outstanding securities; or (iv) the stockholders of IPL approve a plan of
complete liquidation of IPL or an agreement for the sale or disposition by IPL
of all or substantially all of IPL's assets.
"Termination of employment for cause" means termination upon (i) the
willful and continued failure by the executive to substantially perform his
duties with IPL (other than any such failure resulting from his incapacity due
to physical or mental illness or any such actual or anticipated failure), or
(ii) the willful engaging by the executive in conduct which is demonstrably and
materially injurious to IPL, monetarily or otherwise.
"Good reason" means (i) during the nine (9) month period following a change
in control, a good faith determination by the executive that, as a result of
such change in control, he is not able to discharge his duties effectively or
(ii) without the executive's express written consent, the occurrence after a
change in control of any of the following circumstances:(A) the assignment to
the executive of any duties inconsistent (except in the nature of a promotion)
with the position in IPL that he held immediately prior to the change in control
or a substantial adverse alteration in the nature or status of his position or
responsibilities or the conditions of his employment from those in effect
immediately prior to the change in control; (B) a reduction by IPL in the
executive's annual base salary; (C) IPL's requiring the executive to be based
more than twenty-five (25) miles from IPL's offices at which he was principally
employed immediately prior to the date of the change in control except for
required travel on IPL's business to an extent substantially consistent with his
present business travel obligations; (D) the failure by IPL to pay to the
executive any portion of his current compensation or compensation under any
deferred compensation program of IPL, within seven (7) days of the date such
compensation is due; (E) the failure by IPL to continue in effect any material
compensation or benefit plan, or to provide benefits to the executive, on a
basis not materially less favorable, both in terms of the amount of benefits
provided to the executive and the level of his participation relative to other
participants, than existed at the time of the change in control; or (F) any
purported termination of the executive's employment which is not effected
pursuant to the terms of the Severance Agreement.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No member of the Compensation Committee during the year ended December 31,
1996 is or has been an officer or employee of IPL.
CERTAIN TRANSACTIONS
IPL has an agreement, entered into in January 1995, to provide contract
engineering services to Firecracker Technology Corp. ("FT Corp"), a private
company established and owned by Stephen J. Ippolito to develop certain computer
components for personal computers and PC servers, a market outside of IPL's
current business. IPL is currently providing these services through three
engineers hired for this project, who are managed by Mr. Ippolito. The amount of
these services, which are charged to FT Corp at a 2% mark-up over cost based on
an allocation of all overhead and employment expenses, totalled $130,070 for two
full-time equivalent engineers during 1996. In addition, in recognition of Mr.
Ippolito's work on these FT Corp matters, his base salary payable by IPL was
reduced by 25% during 1996. In exchange for IPL's services, IPL has a right to
purchase at the lowest price (as defined), and on other terms no less favorable
than those at which FT Corp is then selling to third parties, any products
developed by IPL pursuant to the agreement. The agreement may be terminated by
either party on thirty days notice and contains certain mutual nonsolicitation
covenants which continue after termination and which provide for transfer of the
project employees to FT Corp.
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<PAGE> 54
PROPOSAL TO AMEND THE EQUITY PLAN
GENERAL
In March 1996, the IPL Board adopted the 1996 Equity Incentive Plan (the
"1996 Equity Plan") as part of a new initiative to provide more equity
incentives for certain key employees and to a broader range of employees and
consultants. The purpose of the 1996 Equity Plan was to attract and retain key
employees and consultants, to provide an incentive for them to assist IPL to
achieve long-range performance goals and to enable them to participate in the
longterm growth of IPL.
Prior to the establishment of the 1996 Equity Plan, the IPL Board granted
an incentive stock option (the "1995 Equity Plan") with respect to 115,000
shares of IPL Stock to Ronald J. Gellert upon his election as the President and
Chief Executive Officer of IPL. The 1995 Equity Plan was granted on the same
terms as IPL's 1991/1993 Consolidated Equity Plan (the "1993 Plan"), but was
treated as a separate plan because there were not sufficient shares available
under the 1993 Plan to cover the 1995 Equity Plan. At the 1996 Annual Meeting,
IPL stockholders approved a proposal to consolidate the 1996 Equity Plan with
the 1995 Equity Plan into a single plan to be known as the "IPL Systems, Inc.
1996 Consolidated Equity Incentive Plan" (the "Equity Plan").
Currently awards may be made under the Equity Plan for up to 650,000 shares
of IPL Stock and awards to any individual are subject to a 250,000 share
limitation, subject to adjustment for stock splits, stock dividends and certain
transactions affecting IPL's capital stock.
The Equity Plan as it is proposed to be amended is set forth as the "IPL
1996 Consolidated Equity Incentive Plan" in Annex IV to this Proxy Statement.
ADMINISTRATION AND ELIGIBILITY
The Equity Plan provides for the grant of stock options (incentive and
nonstatutory) and stock appreciation rights (the "Awards"). Approximately 44
people are currently eligible to participate in the Equity Plan, including IPL's
officers, directors, employees and consultants. Awards under the Equity Plan may
be granted to Eligible Persons as determined by the full IPL Board or by a
committee of at least two members of the IPL Board, each of whom is intended to
qualify as a "Non-Employee Director" or the equivalent within the meaning of
Rule 16b-3 under the Exchange Act. The IPL Board has designated the Compensation
Committee of the IPL Board to administer the plan.
The amount of Awards to be received under the Equity Plan by each of the
executive officers named in the Summary Compensation Table, the current
executive officers of IPL as a group, all current directors who are also
consultants to IPL and all employees, including all current officers of IPL who
are not executive officers, as a group, is not determinable because it is in the
discretion of the Compensation Committee. For details on options granted during
the last fiscal year under the Equity Plan to certain executive officers, see
"EXECUTIVE COMPENSATION -- Executive Compensation Tables". In general, as of
April 25, 1997, stock options to purchase an aggregate of 356,500 shares of IPL
Stock had been granted under the Equity Plan. Of the foregoing, options to
purchase an aggregate of 185,000 shares of IPL Stock had been granted to four
current executive officers, options to purchase an aggregate of 50,000 shares of
IPL Stock had been granted to two current directors who are not executive
officers, and options to purchase an aggregate of 121,500 shares of IPL Stock
had been granted to all other employees. After taking into account shares
available as a result of cancellation of options granted under the Equity Plan,
348,500 shares of IPL Stock remain available for Awards under the Equity Plan.
No Awards other than stock options have been granted under the Equity Plan. The
closing price of the IPL Stock on April 25, 1997 as reported by the Nasdaq Stock
Market was $1.625 per share.
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<PAGE> 55
PURCHASE TERMS AND PRICE
Awards under the Equity Plan are granted at the discretion of the
Compensation Committee or the IPL Board, which determines the Eligible Persons
to whom, and the times at which, Awards shall be granted, the type of Award to
be granted and all other related terms, conditions and provisions of each Award
granted. However, while the Compensation Committee has discretion in granting
Awards, the plan contains the following limitations:
Stock Options. The exercise price of stock options may not be less than
100% of the fair market value of IPL Stock on the date of the grant; provided,
however, that in the case of a nonstatutory stock option granted to a new
employee of IPL within 90 days of the date of employment, the exercise price may
be less than 100% of fair market value on the date of such Award so long as such
price is not less than 100% of fair market value at the date of employment. No
option granted under the Equity Plan is transferable by the optionee other than
by will or the laws of descent and distribution, and each option is exercisable
during the lifetime of the optionee only by such optionee. There is no limit in
the Equity Plan for the term of options granted thereunder, but for tax purposes
the term of any incentive stock option ("ISO") may not exceed ten years and for
other reasons the Compensation Committee may otherwise provide a shorter term
for options granted under the Equity Plan.
Stock Appreciation Rights. The exercise price of any stock appreciation
right ("SAR") may not be less than 50% of the fair market value of the IPL Stock
on the date of the grant, or in the case of SARs in tandem with options, the
exercise price of the related options; provided, however, that (i) in the case
of an SAR granted to a new employee of IPL within 90 days of the date of
employment, the exercise price may be less than 100% of fair market value on the
date of such Award so long as such price is not less than 100% of fair market
value at the date of employment, and (ii) in the case of an SAR granted in
tandem with a Stock Option, the exercise price may be less than 100% of fair
market value on the date of such Award so long as such exercise price is not
less than the exercise price of the related Stock Option.
The Equity Plan provides that the number of shares that may be subject to
Awards for any individual shall not exceed in the aggregate more than 250,000
shares (subject to adjustment for stock splits and similar capital changes). In
addition, to the extent required to qualify for the exemption provided by Rule
16b-3 under the Exchange Act, and any successor provision, (i) any IPL Stock or
other equity security offered under the Equity Plan to an executive officer of
IPL may not be sold for at least six months after acquisition or, in the case of
a stock option, for at least six months after the grant of the option, and (ii)
any option, SAR or other similar right related to an equity security, issued
under the plan to an executive officer shall not be transferable by such person
other than by will or the laws of descent and distribution, or pursuant to a
qualified domestic relations order as defined in the Code or Title I of the
Employee Retirement Income Security Act, or the rules thereunder.
FEDERAL INCOME TAX CONSEQUENCES RELATING TO STOCK OPTIONS
Incentive Stock Options. An optionee does not realize taxable income upon
the grant or exercise of an ISO under the Equity Plan.
If no disposition of shares issued to an optionee pursuant to the exercise
of an ISO is made by the optionee within two years from the date of grant or
within one year from the date of exercise, then (i) upon sale of such shares,
any amount realized in excess of the option price (the amount paid for the
shares) is taxed to the optionee as long-term capital gain and any loss
sustained will be a long-term capital loss and (ii) no deduction is allowed to
IPL for Federal income tax purposes. The exercise of ISOs gives rise to an
adjustment in computing alternative minimum taxable income that may result in
alternative minimum tax liability for the optionee.
If shares of IPL Stock acquired upon the exercise of an ISO are disposed of
prior to the expiration of the twoyear and one-year holding periods described
above (a "disqualifying disposition") then (i) the optionee realizes ordinary
income in the year of disposition in an amount equal to the excess (if any) of
the fair market value of the shares at exercise (or, if less, the amount
realized on a sale of such shares) over the option price
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<PAGE> 56
thereof and (ii) IPL is entitled to deduct such amount for federal income tax
purposes. Any further gain realized is taxed as a short-term or long-term
capital gain and does not result in any deduction to IPL. A disqualifying
disposition in the year of exercise will generally avoid the alternative minimum
tax consequences of the exercise of an ISO.
Nonstatutory Stock Options. No income is realized by the optionee at the
time a nonstatutory option is granted. Upon exercise, (i) ordinary income is
realized by the optionee in an amount equal to the difference between the option
price and the fair market value of the shares on the date of exercise and (ii)
IPL receives a tax deduction for the same amount, subject to applicable
withholding requirements. Upon disposition of the shares, appreciation or
depreciation after the date of exercise is treated as a short-term or long-term
capital gain or loss and will not result in any deduction by IPL.
VOTE REQUIRED
The affirmative vote by the holders of a majority in interest of the shares
of IPL Stock present, or represented, and entitled to vote at the meeting is
required to approve the proposed amendments to the Equity Plan. Broker non-votes
will not be counted as present or represented for this purpose. Abstentions will
be counted as present and entitled to vote and, accordingly, will have the
effect of negative votes.
The IPL Board has voted, subject to the approval of the IPL stockholders
and the consummation of the Merger, to increase the aggregate number of shares
of IPL Stock that may be subject to grants under the Equity Plan from 650,000 to
2,500,000, and to increase the number of shares that may be subject to Awards
for any individual from 250,000 to 1,000,000, in each case, subject to
adjustment for stock splits, stock dividends and certain other transactions
affecting IPL's capital stock. IPL believes that this increase is necessary and
appropriate because the Merger would result in a four-fold increase in the
number of outstanding shares of IPL Stock. Furthermore, most ANDATACO employees
have never been granted stock options. The amendment would permit grants under
the Equity Plan to such ANDATACO employees. The IPL Board believes that a policy
of granting stock options to large numbers of employees helps align the
interests of the employees with those of stockholders, plays a significant role
in attracting qualified employees and may reduce employee turnover.
THE IPL BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR THE EQUITY
PLAN PROPOSAL.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES
EXCHANGE ACT OF 1934
Section 16(a) of the Exchange Act requires IPL's directors and executive
officers, and persons who own more than ten percent of a registered class of
IPL's equity securities, to file with the Securities and Exchange Commission
initial reports of ownership and reports of changes in ownership of IPL Stock
and other equity securities of IPL. Officers, directors and greater than
ten-percent stockholders are required by Securities and Exchange Commission
regulation to furnish IPL with copies of all Section 16(a) forms they file.
To IPL's knowledge, based solely on review of the copies of such forms
furnished to IPL and written representations that no other reports were
required, during the fiscal year ended December 31, 1996, all Section 16(a)
filing requirements applicable to ten-percent stockholders known to IPL were
complied with and all Section 16(a) filing requirements applicable to its
officers and directors were timely met.
IPL SHARE OWNERSHIP
The following table sets forth certain information regarding the ownership
of IPL Stock as of March 1, 1997 by (i) persons known by IPL to be beneficial
owners of more than 5% of its outstanding IPL Stock, (ii) the directors and
nominees for election as directors of IPL, (iii) the Chief Executive Officer and
each of the four most highly compensated executive officers of IPL other than
the Chief Executive Officer, (iv) persons who served as Chief Executive Officer
of IPL at any time during 1996, and (v) all current
48
<PAGE> 57
executive officers and directors of IPL as a group. Unless otherwise indicated
in the footnotes to the table, these beneficial owners have sole voting power
and sole investment power over the shares they own. If the Merger is
consummated, Mr. Sykes will beneficially own up to 18,258,702 shares, or
approximately 74.4%, of the shares of IPL Stock outstanding, and Mr. Hudzik will
beneficially own up to 91,294 shares, or approximately 0.4% of the shares of IPL
Stock outstanding.
<TABLE>
<CAPTION>
IPL STOCK WITHOUT GIVING IPL STOCK AFTER GIVING
EFFECT TO THE MERGER EFFECT TO THE MERGER
------------------------ ------------------------
AMOUNT OF AMOUNT OF
BENEFICIAL PERCENT BENEFICIAL PERCENT
BENEFICIAL OWNER OWNERSHIP OF CLASS OWNERSHIP OF CLASS
- -------------------------------------------------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Stephen J. Ippolito............................... 926,412(2) 16.3% 926,412(2) 3.8%
IPL Systems, Inc.
124 Acton Street
Maynard, MA 01754
Ronald J. Gellert................................. 23,000(3) * 23,000(3)(4) *
Anita D. Buchanan................................. 4,000(3) * 4,000(3) *
Eugene F. Tallone................................. 22,000(3) * 22,000(3) *
Cornelius P. McMullan............................. 27,000(3) * 27,000(3) *
Harris Ravine..................................... 27,000(3) * 27,000(3) *
All executive officers and directors as a group (6
persons)........................................ 1,029,412(5) 17.8% 1,029,412(5) 4.2%
</TABLE>
- ---------------
*Indicates less than 1%.
(1) Assumes 18,486,936 shares of IPL Stock are issued in the Merger.
(2) Includes 35,000 shares which may be acquired within 60 days after March 1,
1997 upon the exercise of options and which are treated as outstanding for
purposes of computing the percentage.
(3) Consists of shares which may be acquired within 60 days after March 1, 1997
upon the exercise of options and which are treated as outstanding for
purposes of computing the percentage.
(4) Does not include options with respect to 117,000 shares of IPL Stock that
shall become fully exercisable after the Merger if Mr. Gellert's employment
is terminated under circumstances set forth in the executive severance
agreement between Mr. Gellert and IPL. See "EXECUTIVE COMPENSATION --
Executive Severance and Employment Agreements."
(5) Includes 138,000 shares which may be acquired within 60 days after March 1,
1997 upon the exercise of options and which are treated as outstanding for
purposes of computing the percentage.
INDEPENDENT ACCOUNTANTS
The consolidated financial statements and related financial statement
schedules of IPL Systems, Inc. as of December 31, 1996 and 1995 and for each of
the years in the three-year period ended December 31, 1996 included in this
Proxy Statement have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report appearing herein (which report expresses an
unqualified opinion and includes an explanatory paragraph referring to an
uncertainty about the ability of IPL to continue as a going concern).
The balance sheets of ANDATACO as of October 31, 1995 and 1996, and the
related statements of operations, stockholders' equity and cash flows for each
of the three years in the period ended October 31, 1996, have been audited by
Price Waterhouse LLP, independent accountants, as stated in their reports
appearing herein.
STOCKHOLDER PROPOSALS
In order for a stockholder proposal to be considered for inclusion in IPL's
proxy materials for the 1998 annual meeting, it must be received by IPL at IPL
Systems, Inc., 124 Acton Street, Maynard, Massachusetts 01754, Attention: Clerk,
no later than December 20, 1997.
49
<PAGE> 58
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
IPL HISTORICAL FINANCIAL STATEMENTS
Report of Independent Accountants of IPL.............................................. F-2
Consolidated Balance Sheets as of December 31, 1996 and 1995.......................... F-3
Consolidated Statements of Operations for the years ended December 31, 1996, 1995 and
1994................................................................................ F-4
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1996,
1995 and 1994....................................................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and
1994................................................................................ F-6
Notes to Consolidated Financial Statements, years ended December 31, 1996, 1995 and
1994................................................................................ F-7
ANDATACO HISTORICAL FINANCIAL STATEMENTS
Report of Independent Accountants of ANDATACO......................................... F-15
Balance Sheet as of January 31, 1997 (unaudited) and October 31, 1996 and 1995........ F-16
Statement of Operations for the three months ended January 31, 1997 (unaudited) and
1996 (unaudited) and the years ended October 31, 1996, 1995 and 1994................ F-17
Statement of Shareholder's Equity for the three months ended January 31, 1997
(unaudited) and the years ended October 31, 1996, 1995 and 1994..................... F-18
Statement of Cash Flows for the three months ended January 31, 1997 (unaudited) and
1996 (unaudited) and the years ended October 31, 1996, 1995 and 1994................ F-19
Notes to Financial Statements......................................................... F-20
</TABLE>
F-1
<PAGE> 59
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders of
IPL Systems, Inc.
Maynard, Massachusetts
We have audited the accompanying consolidated balance sheets of IPL
Systems, Inc. and its subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of IPL Systems, Inc. and its
subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
2 to the consolidated financial statements, the Company's losses from operations
and past and anticipated cash flow deficiencies raise substantial doubt about
its ability to continue as a going concern. Management's plans concerning these
matters are also described in Note 2. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
As discussed in Note 14 to the consolidated financial statements, the
Company has signed a Definitive Agreement of Merger and Reorganization dated as
of February 28, 1997 with anDATAco and taken certain other related actions.
/s/ DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 21, 1997
(Except for Note 14, for which
the date is March 7, 1997)
F-2
<PAGE> 60
IPL SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
------------ -----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and equivalents........................................ $ 2,274,080 $ 3,595,268
Accounts receivable -- trade (net of allowance for doubtful
accounts of $353,000 and $2,111,000)...................... 2,391,330 4,018,511
Inventories................................................. 3,891,466 3,375,652
Prepaid expenses and other current assets................... 428,289 404,564
------------ -----------
Total current assets................................... 8,985,165 11,393,995
------------ -----------
Equipment, Fixtures and Leasehold Improvements:
Manufacturing equipment..................................... 4,931,807 4,883,499
Office equipment and fixtures............................... 2,190,977 2,319,517
Customer support equipment.................................. 3,103,577 3,500,011
Leasehold improvements...................................... 1,338,598 1,334,788
------------ -----------
11,564,959 12,037,815
Less accumulated depreciation and amortization.............. 9,935,858 9,689,630
------------ -----------
1,629,101 2,348,185
------------ -----------
$ 10,614,266 $13,742,180
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Trade accounts payable...................................... $ 3,188,660 $ 3,583,605
Accrued payroll expenses.................................... 391,554 827,026
Accrued restructuring expenses.............................. 291,773 594,782
Other accrued expenses...................................... 192,307 193,959
------------ -----------
Total current liabilities.............................. $ 4,064,294 $ 5,199,372
------------ -----------
Stockholders' Equity:
Class A common stock, $.01 par value -- authorized,
20,000,000 shares; issued and outstanding, 5,633,819
shares and 5,200,590 shares at December 31, 1996 and 1995,
respectively.............................................. 56,338 52,006
Class C common stock, $.01 par value -- authorized,
2,250,000 shares; issued and outstanding, 386,929 shares
at December 31, 1995...................................... -- 3,869
Additional paid-in capital.................................. 17,378,568 17,230,023
Deficit..................................................... (10,884,934) (8,743,090)
------------ -----------
Total stockholders' equity............................. 6,549,972 8,542,808
------------ -----------
$ 10,614,266 $13,742,180
============ ===========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 61
IPL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- ------------
<S> <C> <C> <C>
Revenues:
Product......................................... $14,593,901 $22,952,315 $ 27,511,453
Service......................................... 2,470,531 1,811,500 2,437,072
----------- ----------- ------------
17,064,432 24,763,815 29,948,525
----------- ----------- ------------
Costs and Expenses:
Cost of sales................................... 9,488,716 15,251,668 26,938,094
Selling, general and administrative expenses.... 8,501,768 11,436,222 15,759,705
Engineering and development..................... 1,438,936 1,317,299 1,784,113
Restructuring expenses (income)................. (100,000) 496,880 1,970,587
----------- ----------- ------------
19,329,420 28,502,069 46,452,499
----------- ----------- ------------
Operating Loss....................................... (2,264,988) (3,738,254) (16,503,974)
Other Income:
Interest........................................ 118,922 199,568 162,857
Other, net...................................... 4,222 74,923 124,906
----------- ----------- ------------
Loss before income tax benefit....................... (2,141,844) (3,463,763) (16,216,211)
Income tax benefit -- Federal........................ -- -- (1,170,000)
Net loss............................................. $(2,141,844) $(3,463,763) $(15,046,211)
=========== =========== ============
Net loss per common and common equivalent share...... $ (0.38) $ (0.63) $ (2.80)
=========== =========== ============
Common and common equivalent shares used in
calculation of net loss per share.................. 5,617,926 5,469,177 5,381,519
=========== =========== ============
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 62
IPL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<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, 1994............... 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
Net loss for the year................ -- -- -- -- -- (2,141,844) (2,141,844)
Exercise of stock options............ 46,300 463 -- -- 122,517 -- 122,980
Consultant's stock option
compensation....................... -- -- -- -- 26,028 -- 26,028
Conversion of Class C to Class A
stock.............................. 386,929 3,869 (386,929) (3,869) -- -- --
--------- ------- -------- ------- ----------- ------------ ------------
Balance, December 31, 1996............. 5,633,819 $56,338 -- $ -- $17,378,568 $(10,884,934) $ 6,549,972
========= ======= ======== ======= =========== ============ ============
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 63
IPL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- ------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss........................................... $(2,141,844) $(3,463,763) $(15,046,211)
Adjustments to reconcile net loss to net cash (used
for) provided by operating activities:
Depreciation and amortization................... 976,561 1,213,005 2,614,596
Loss on the sale of equipment and fixtures...... 27,479 27,072 46,223
Consultant's stock option compensation.......... 26,028 -- --
Noncash restructuring expenses.................. -- -- 1,185,790
Bad debt expense (recoveries)................... (432,535) (1,374,995) 3,173,526
Inventory reserves.............................. 409,473 (1,422,474) 1,382,055
Changes in assets and liabilities:
Accounts receivable -- trade............... 2,059,716 5,971,339 6,279,971
Inventories................................ (925,287) 1,107,188 3,436,420
Prepaid expenses and other current
assets................................... (23,725) (46,599) 177,095
Refundable income taxes.................... -- 1,425,000 475,000
Deferred income taxes...................... -- -- 395,000
Trade accounts payable and accrued payroll
expenses................................. (832,069) (2,248,464) (4,506,131)
Accrued restructuring expenses............. (303,009) 35,496 559,286
----------- ----------- ------------
Total adjustments..................... 982,632 4,686,568 15,218,831
Net cash (used for) provided by
operating activities................ (1,159,212) 1,222,805 172,620
----------- ----------- ------------
Cash Flows from Investing Activities:
Additions to equipment, fixtures and leasehold
improvements.................................. (298,895) (568,488) (2,064,398)
Proceeds from sale of equipment and fixtures.... 13,939 47,514 --
----------- ----------- ------------
Cash used for investing activities.... (284,956) (520,974) (2,064,398)
----------- ----------- ------------
Cash Flows from Financing Activities:
Exercise of stock options....................... 122,980 654,625 --
Cash and Equivalents:
Net (decrease) increase......................... (1,321,188) 1,356,456 (1,891,778)
Balance, beginning of year...................... 3,595,268 2,238,812 4,130,590
----------- ----------- ------------
Balance, end of year............................ $ 2,274,080 $ 3,595,268 $ 2,238,812
=========== =========== ============
Supplemental Disclosure Of Cash Flow Information:
Income taxes paid............................... $ 53,000 $ -- $ 23,000
=========== =========== ============
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 64
IPL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1. INDUSTRY
IPL Systems, Inc. (the "Company"), founded in 1973, provides open
architecture database storage solutions for multi-host computer environments.
The Company supplies its products through direct, indirect and Original
Equipment Manufacturer ("OEM") sales and service channels throughout the world.
2. GOING CONCERN MATTERS
The accompanying consolidated financial statements have been prepared on a
going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. As shown in the
consolidated financial statements, during the years ended December 31, 1996,
1995 and 1994, the Company incurred net losses of $2,141,844, $3,463,763 and
$15,046,211, respectively, and net cash used for operating activities totaled
$1,159,212 in 1996. In addition, the Company anticipates, absent corrective
actions, a cash flow deficiency during 1997. These factors, among others,
indicate that the Company may be unable to continue as a going concern for a
reasonable period of time.
The consolidated financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts or
the amounts and classification of liabilities that might be necessary should the
Company be unable to continue as a going concern. The Company's continuation as
a going concern within the next year is dependent upon its ability to generate
sufficient cash flow from operations to meet its obligations on a timely basis,
and/or to obtain additional financing as may be required. In the long-term, its
success is dependent ultimately on the attainment of successful operational
results.
Management believes that a successful merger, as discussed in Note 14, will
allow the Company to realize certain cost savings, further penetrate the rapidly
expanding open architecture storage market and provide sufficient working
capital to sustain operations through 1997. In the absence of such a merger,
management believes, based on its cash flow estimates, that overhead cost
burdens could be reduced in order to provide a break-even cash flow and result
in the Company's continuance as a going concern only if revenue levels are
substantially increased over current levels. If revenue levels do not increase,
the Company would likely be forced to either liquidate assets or seek outside
sources of financing, which, if available at all, may not be available on
reasonable terms.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates -- The preparation of consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those estimates. In 1996
and 1995, the allowance for doubtful accounts was reduced by $1,758,000 and
$1,557,000, respectively, principally as a result of partial collection of
previously reserved balances.
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.
F-7
<PAGE> 65
IPL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Inventories -- Inventories are stated at the lower of cost (based on the
first-in, first-out method) or market.
At December 31, 1996, the Company was in the process of a product
transition. Inventory levels at that time reflect raw materials,
work-in-process, and finished goods relating to new and existing products.
Management has developed a program to reduce inventory to desired levels over
the near term and believes no loss will be incurred on its disposition.
Equipment, Fixtures and Leasehold Improvements -- Maintenance, repairs and
minor renewals are charged to operations as incurred. Depreciation of equipment
and fixtures is computed by the straight-line method over the estimated useful
lives of the assets which range between two and seven years. Leasehold
improvements are amortized over the term of the lease or the useful lives of the
assets, whichever is shorter. Customer support inventory is valued at cost when
available for service and is amortized over a four-year period using the
straight-line method. The Company continually reviews its equipment, fixtures
and leasehold improvements to determine that the carrying values have not been
impaired.
Stock-Based Compensation -- Effective January 1, 1995, the Company adopted
SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"). SFAS
No. 123 requires that the fair values of stock-based compensation to employees
and non-employees be either disclosed or reported in the consolidated financial
statements. Compensation expense associated with awards of stock or options to
employees is measured using the intrinsic value method. Compensation expense
associated with awards to non-employees is measured using a fair value method.
The effect of adopting SFAS No. 123 for the year ended December 31, 1996 was to
increase net loss by $26,028.
Revenue Recognition -- Product and parts sales are recorded when shipped
under the terms of firm purchase contracts. Service revenue includes parts
sales, warranty, extended warranty and repairs charges. Warranty and extended
warranty revenue for contracts for which the liability for on-site service and
component replacement have been transferred to or assumed by third parties are
recognized at time of sale together with the associated costs. For those
contracts which the Company is liable for any portion of on-site service or
component replacement, the Company recognizes that portion of the warranty and
extended warranty income and expense ratably over the contract period.
Income Taxes -- The Company utilizes the liability method of accounting for
income taxes. Deferred taxes are based on the difference between the financial
statement and tax bases of assets and liabilities, and the deferred tax expense
or credit represents the change in the deferred tax asset or liability balance.
Loss Per Share -- Loss per common and common equivalent share is computed
based on the weighted average number of shares outstanding and the dilutive
effect (when applicable) of common share equivalents based on the treasury stock
method. Common share equivalents are not included in loss periods as the effect
is anti-dilutive.
Reclassifications -- Certain amounts in the 1995 and 1994 consolidated
financial statements have been reclassified to conform with the 1996
presentation.
F-8
<PAGE> 66
IPL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
4. INVENTORIES
Inventories consist of the following at December 31:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Raw materials............................... $1,764,001 $1,460,423
Work-in-process............................. 976,978 651,245
Finished goods.............................. 1,150,487 1,263,984
---------- ----------
$3,891,466 $3,375,652
========== ==========
</TABLE>
5. INCOME TAXES
Income tax expense (benefit) consists of the following for the years ended
December 31:
<TABLE>
<CAPTION>
1996 1995 1994
--------- ---------- -----------
<S> <C> <C> <C>
Current -- federal................. $ -- $ -- $(1,565,000)
Deferred:
Federal....................... (711,000) (974,000) (4,255,000)
State......................... (101,000) (305,000) (1,125,000)
Change in valuation
allowance................... 812,000 1,279,000 5,775,000
--------- ---------- -----------
$ -- $ -- $(1,170,000)
========= ========== ===========
</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 tax benefit for the years ended December 31:
<TABLE>
<CAPTION>
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
U.S. federal statutory rate.............. (35.0)% (35.0)% (35.0)%
Change in valuation allowance............ 37.9 36.9 35.6
Benefit of prior year tax credits........ -- -- (5.3)
Other, net............................... (2.9) (1.9) (2.5)
----- ----- -----
0.0% 0.0% (7.2)%
===== ===== =====
</TABLE>
The tax effects of significant items comprising the Company's deferred tax
assets as of December 31 are as follows:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Reserves and accruals not currently
deductible:
Accounts receivable.................... $ 141,000 $ 865,000
Inventory.............................. 409,000 238,000
Warranty............................... 352,000 294,000
Compensation........................... 41,000 56,000
Restructuring.......................... 117,000 238,000
Other.................................. 1,000 131,000
----------- -----------
1,061,000 1,822,000
Depreciation................................ 258,000 467,000
Loss carryforward amounts................... 6,063,000 4,280,000
Tax credits................................. 944,000 945,000
----------- -----------
8,326,000 7,514,000
Valuation allowance......................... (8,326,000) (7,514,000)
----------- -----------
$ -- $ --
=========== ===========
</TABLE>
F-9
<PAGE> 67
IPL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
The Company has approximately $13,652,000 in net federal operating loss
carryforwards which expire through 2011, and approximately $25,703,000 in state
operating loss carryforwards which expire through 2001. The ability of the
Company to utilize these loss carryforward amounts will be limited in the event
of a change in control, as defined by the Internal Revenue Code. The change in
the valuation allowance represents the amount required to fully reserve against
the recorded deferred tax assets, due to uncertainty about their future
realization.
6. LEASE COMMITMENT AND RENT EXPENSE
The Company leases manufacturing and office facilities under a lease which
expires in 1998 and leases office space at various U.S. locations and in Belgium
under leases which expire through 1997. The following is a schedule by years of
future rental payments, net of related sublease income, required under these
leases:
<TABLE>
<S> <C>
1997................................................. $278,682
1998................................................. 68,551
</TABLE>
Rental expense, net of sublease income, amounted to approximately $370,000,
$493,000 and $564,000 in 1996, 1995 and 1994, respectively.
7. CLASS C COMMON STOCK
Class C common stock was convertible into an equal number of shares of
Class A common stock at any time at the option of the holder but was required to
be converted if the number of shares of Class C common stock outstanding became
less than 5% of all shares outstanding. In 1995 and through February 6, 1996,
the Class C shares were converted to Class A common stock.
8. EMPLOYEE STOCK PLANS
The Consolidated 1991/1993 Equity Incentive Plan (the "1993 Plan") provides
for the grant of incentive stock options, nonstatutory stock options and stock
appreciation rights to key employees and consultants, subject to terms and
conditions determined by the Company. A total of 650,000 shares of Class A
common stock has been reserved for issuance under the 1993 Plan.
In December 1995, the Company granted an option (the "1995 Plan") with
respect to 115,000 shares not covered by the 1993 Plan.
In 1996, the stockholders approved the Consolidated 1996 Equity Incentive
Plan (the "1996 Plan") to provide for grants of incentive stock options to
employees and consultants, subject to terms and conditions determined by the
Company. Upon approval of the 1996 Plan, the 1995 Plan was consolidated with the
1996 Plan (the "Consolidated 1996 Plan"). A total of 650,000 shares of Class A
common stock, which includes the 115,000 shares of the 1995 Plan, has been
reserved for issuance under the Consolidated 1996 Plan.
On December 29, 1994, the Company amended incentive stock options
previously granted with respect to an aggregate of 357,000 shares of Class A
common stock under the 1993 Plan, whereby options were repriced to market value
on that date. There was no financial statement impact as a result of this
change.
Under the 1993 Director Stock Option Plan (the "Director Plan"), directors
who are not employees of the Company are granted initial options of 10,000
shares of Class A common stock, which are exercisable over five years, subject
to continued service as a director. A total of 75,000 shares of Class A common
stock has been reserved for issuance under the Director Plan.
F-10
<PAGE> 68
IPL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
The following table presents activity under the:
<TABLE>
<CAPTION>
1993 AND 1996 CONSOLIDATED PLANS DIRECTOR PLAN
-------------------------------------- --------------------------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
NUMBER AVERAGE AVERAGE NUMBER AVERAGE AVERAGE
OF OPTIONS EXERCISE PRICE FAIR VALUE OF OPTIONS EXERCISE PRICE FAIR VALUE
---------- -------------- ---------- ---------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, January 1, 1994........ 590,500 $ 7.46 20,000 $ 9.25
Granted........................ 570,000 2.90 4,000 7.25
Exercised...................... -- -- -- --
Terminated..................... (520,500) 7.58 -- --
-------- -------
Outstanding, December 31, 1994...... 640,000 3.84 24,000 8.92
Granted........................ 209,500 3.38 $ 1.79 20,000 4.44 $ 2.35
Exercised...................... (206,000) 3.18 -- --
Terminated..................... (121,200) 7.62 (12,000) 8.92
-------- -------
Outstanding, December 31, 1995...... 522,300 3.04 32,000 6.12
Granted........................ 243,500 2.40 1.08 12,000 14.54 3.27
Exercised...................... (46,300) 2.66 -- --
Terminated..................... (143,900) 3.48 (7,200) 8.92
-------- -------
Outstanding, December 31, 1996...... 575,600 2.69 36,800 8.32
======== =======
Exerciseable, December 31, 1996..... 176,800 16,800
======== =======
Exerciseable, December 31, 1995..... 139,400 4,400
======== =======
</TABLE>
The following table sets forth information regarding options outstanding at
December 31, 1996 under the 1993 and 1996 Consolidated Plans:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
WEIGHTED WEIGHTED EXERCISE
RANGE OF NUMBER AVERAGE AVERAGE PRICE FOR
EXERCISE CURRENTLY EXERCISE REMAINING CURRENTLY
NUMBER OF OPTIONS PRICES EXERCISABLE PRICE LIFE (YEARS) EXERCISABLE
- --------------------------------------- ------------ ----------- -------- ------------ -----------
<S> <C> <C> <C> <C> <C>
418,100................................ $2.00 -- 3.00 143,500 $ 2.40 6.7 $2.29
153,500................................ 3.25 -- 4.88 31,300 3.31 9.0 3.04
4,000................................ 8.75 2,000 8.75 6.6 8.75
</TABLE>
The following table sets forth information regarding options outstanding at
December 31, 1996 under the Director Plan:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
WEIGHTED WEIGHTED EXERCISE
RANGE OF NUMBER AVERAGE AVERAGE PRICE FOR
EXERCISE CURRENTLY EXERCISE REMAINING CURRENTLY
NUMBER OF OPTIONS PRICES EXERCISABLE PRICE LIFE (YEARS) EXERCISABLE
- -------------------------------------- ------------- ----------- -------- ------------ -----------
<S> <C> <C> <C> <C> <C>
10,000................................ $ 3.25 2,000 $ 3.25 8.9 $ 3.25
10,000................................ 5.63 2,000 5.63 8.4 5.63
16,800................................ 7.25 -- 20.50 12,800 12.94 6.6 14.09
</TABLE>
F-11
<PAGE> 69
IPL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
The fair value of options on their grant date under all stock option plans
was measured using the Black/Scholes option pricing model. Key assumptions used
to apply this pricing model are as follows:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Risk-free interest rate............................................... 6.01% 6.01%
Expected life of option grants........................................ 1-5 years 1-5 years
Expected volatility of underlying stock............................... 80% 80%
Expected dividend payment rate, as a percentage of the stock price on
the date of grant................................................... -- --
Expected terminations................................................. 50% 50%
</TABLE>
The option pricing model used was designed to value readily tradeable stock
options with relatively short lives. The options granted to employees are not
tradeable with contractual lives of up to ten years and graded vesting up to
five years. However, management believes that the assumptions used to value the
options and the model applied yield a reasonable estimate of the fair value of
the grants made under the circumstances.
As described in Note 3, the Company uses the intrinsic value method to
measure compensation expense associated with grants of stock options to
employees. During 1996, the Company granted options to purchase 50,000 shares of
Class A common stock under the 1996 Consolidated Plan to certain Directors
acting as non-employee consultants. The compensation expense relating to those
options, as valued using the fair value method, aggregated $26,028 and is
included in net loss for the year ended December 31, 1996. Had the Company used
the fair value method for all options to measure compensation, reported net
income and earnings per share would have been as follows:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Net loss:
As reported.............................. $(2,141,844) $(3,463,763)
Pro forma................................ (2,275,376) (3,674,539)
Net loss per common share:
As reported.............................. (.38) (.63)
Pro forma................................ (.40) (.67)
</TABLE>
9. EMPLOYEE BENEFIT PLANS
Effective December 1, 1991, the Company adopted the IPL Systems, Inc.
401(k) Plan under Section 401(k) of the Internal Revenue Code. The 401(k) plan
covers substantially all employees who meet minimum service requirements. The
amount of the Company's annual contribution is discretionary. No contributions
were made by the Company for the years ended December 31, 1996, 1995 and 1994.
10. RELATED PARTY
Sales -- The Company has a distribution agreement with certain European
affiliates of Olivetti Holding N.V. ("Olivetti"), entered into while Olivetti
was the beneficial owner of the issued and outstanding Class C common stock.
Sales to these entities, all in Europe, totaled $2,401,000, $3,630,000 and
$7,763,000 in 1996, 1995 and 1994, respectively. Related amounts outstanding,
included in accounts receivable -- trade, totaled $318,000 and $1,147,000 at
December 31, 1996 and 1995, respectively.
Purchases -- The Company contracts with Olivetti N.A., Inc., a subsidiary
of Olivetti, to provide installation and warranty coverage for the majority of
the Company's U.S. product sales. Expenses incurred by the Company in connection
with this agreement totaled $1,114,000, $1,612,000 and $1,759,000 in 1996, 1995
and 1994, respectively, of which $251,000 is included in trade accounts payable
at December 31, 1995.
F-12
<PAGE> 70
IPL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
11. SALES INFORMATION
Major Customers -- The Company had sales to an unaffiliated major customer
of approximately $2,796,000 (16% of revenue) in 1996 and $3,675,000 (15% of
revenue) to a different unaffiliated customer in 1994.
Exports -- Export sales to unaffiliated customers which are principally in
Europe, on materially the same terms as to domestic customers, totaled
$2,190,000, $4,741,000 and $6,115,000 in 1996, 1995 and 1994, respectively.
12. RESTRUCTURING EXPENSES
In November 1994, the Company approved and executed a restructuring program
(the "Plan") to focus future product development and sales efforts in the open
systems market. As a result of this change in product strategy, the Company
streamlined its operations by reducing its workforce, consolidating and closing
certain facilities and writing off idle and excess assets. These costs are
presented in the Company's 1994 consolidated statement of operations as a
restructuring charge of $1,970,587.
In September 1995, the Company revised its estimates of the costs
associated with the Plan and recorded an additional restructuring charge of
$496,880 related to the net lease obligation on certain idle facilities.
In March 1996, the Company changed its estimate of the cost of the Plan and
recognized a reduction in future net lease expenses in the amount of $100,000,
net of required additional leasehold improvements, following the sublease of
certain excess space to an unrelated party.
Restructuring charges were recorded and payments were made in 1996, 1995
and 1994 as follows:
<TABLE>
<CAPTION>
1994
------------------------------------------
BALANCE,
DECEMBER 31,
INITIAL EXPENSE PAID 1994
---------------- -------- ------------
<S> <C> <C> <C>
Excess space:
Occupancy costs, net................................ $ 473,652 $ 2,269 $471,383
Write-down of leasehold improvements................ 850,914 -- --
Write-down of idle assets........................... 334,876 -- --
Severance costs..................................... 311,145 223,242 87,903
---------- -------- --------
$1,970,587 $225,511 $559,286
========== ======== ========
</TABLE>
<TABLE>
<CAPTION>
1995
-------------------------------------
BALANCE,
ADDITIONAL DECEMBER 31,
RESERVE PAID 1995
----------- -------- ------------
<S> <C> <C> <C>
Excess space:
Occupancy costs, net................................... $ 496,880 $373,481 $594,782
Severance costs........................................ -- 87,903 --
--------- -------- --------
$ 496,880 $461,384 $594,782
========= ======== ========
</TABLE>
<TABLE>
<CAPTION>
1996
---------------------------------------
BALANCE,
REDUCTION IN DECEMBER 31,
EXPENSES PAID 1996
------------- -------- ------------
<S> <C> <C> <C>
Excess space -- occupancy costs (income), net............. $(100,000) $203,009 $291,773
</TABLE>
F-13
<PAGE> 71
IPL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
13. CONTINGENCIES
The Company is the subject of various legal proceedings which arose in the
normal course of business, the outcome of which management believes will not be
material to the Company's consolidated financial position, operations or
liquidity.
14. SUBSEQUENT EVENTS
The Company entered into a Definitive Agreement of Merger and
Reorganization dated as of February 28, 1997, with anDATAco, a California-based,
privately held company that designs, manufactures and markets network storage
solutions. Under the terms of the agreement, the shareholders of anDATAco will
receive approximately three shares for each share of the Company deemed to be
outstanding on a fully diluted basis. The merger is subject to various
conditions, including approval by the stockholders of the Company and other
regulatory and third-party approvals.
On February 24, 1997, the Company and anDATAco entered into a one-year
nonexclusive OEM Agreement, whereby anDATAco will purchase up to $1,500,000 of
product from the Company in each of March and April 1997.
On March 7, 1997, the Company terminated the employment of its direct sales
force, many of whom were subsequently employed by anDATAco.
* * * * * *
F-14
<PAGE> 72
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders of
ANDATACO
In our opinion, the accompanying balance sheet and the related statements
of operations, of shareholder's equity (deficit) and of cash flows present
fairly, in all material respects, the financial position of ANDATACO at October
31, 1995 and 1996, and the results of its operations and its cash flows for each
of the three years in the period ended October 31, 1996, in conformity with
generally accepted accounting principles. 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 of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PRICE WATERHOUSE LLP
San Diego, California
January 22, 1997
F-15
<PAGE> 73
ANDATACO
BALANCE SHEET
<TABLE>
<CAPTION>
OCTOBER 31,
------------------------- JANUARY 31,
1995 1996 1997
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash............................................... $ 305,000 $ 765,000 $ 338,000
Accounts receivable................................ 13,472,000 12,980,000 12,670,000
Inventories........................................ 10,325,000 7,149,000 8,102,000
Other current assets............................... 142,000 214,000 257,000
----------- ----------- -----------
Total current assets.......................... 24,244,000 21,108,000 21,367,000
Property and equipment, net............................. 2,139,000 2,463,000 2,418,000
Other assets............................................ 98,000 96,000 148,000
----------- ----------- -----------
$26,481,000 $23,667,000 $23,933,000
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Accounts payable................................... $14,919,000 $10,053,000 $ 8,244,000
Accrued expenses................................... 1,820,000 1,359,000 1,535,000
Deferred revenue................................... 318,000 400,000 490,000
Accrued warranty costs............................. 208,000 200,000 200,000
Bank line of credit................................ 2,545,000 -- --
Current portion of notes payable................... 339,000 164,000 164,000
Current portion of shareholder loan................ 456,000.... -- --
----------- ----------- -----------
Total current liabilities..................... 20,605,000 12,176,000 10,633,000
=========== =========== ===========
Bank line of credit..................................... -- 7,053,000 9,000,000
Bonuses payable......................................... 275,000 167,000 167,000
Notes payable, less current portion..................... 254,000 142,000 114,000
Shareholder loan........................................ 3,229,000 4,927,000 4,927,000
----------- ----------- -----------
Total long-term liabilities................... 3,758,000 12,289,000 14,208,000
=========== =========== ===========
Commitments and contingencies (Note 5)
Shareholders' equity (deficit):
Common stock, no par value, 25,000 shares
authorized, 10,000 shares issued and
outstanding...................................... 2,000 2,000 2,000
Retained earnings (accumulated deficit)............ 2,116,000 (800,000) (910,000)
----------- ----------- -----------
Total shareholder's equity (deficit).......... 2,118,000 (798,000) (908,000)
----------- ----------- -----------
$26,481,000 $23,667,000 $23,933,000
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-16
<PAGE> 74
ANDATACO
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION> THREE MONTHS ENDED
YEAR ENDED OCTOBER 31, JANUARY 31,
---------------------------------------- ---------------------------
1994 1995 1996 1996 1997
----------- ------------ ----------- ------------ ------------
(UNAUDITED) (UNAUDITED)
------------ ------------
<S> <C> <C> <C> <C> <C>
Sales............................................... $83,559,000 $100,048,000 $99,733,000 $25,551,000 $25,497,000
Cost of sales....................................... 67,992,000 79,076,000 80,375,000 20,901,000 19,505,000
----------- ------------ ----------- ----------- -----------
Gross profit.................................... 15,567,000 20,972,000 19,358,000 4,650,000 5,992,000
Selling expenses.................................... 6,086,000 7,525,000 7,729,000 2,619,000 3,066,000
Research and development............................ -- -- 919,000 398,000 464,000
General and administrative expenses................. 9,300,000 10,649,000 9,840,000 1,851,000 2,227,000
----------- ------------ ----------- ----------- -----------
Income (loss) from operations....................... 181,000 2,798,000 870,000 (218,000) 235,000
Other income (expenses)
Interest income................................. 5,000 8,000 1,000 3,000 --
Interest expense................................ (645,000) (710,000) (773,000) (182,000) (345,000)
Other........................................... 259,000 40,000 (59,000) (7,000) --
----------- ------------ ----------- ----------- -----------
(381,000) (662,000) (831,000) (186,000) (345,000)
----------- ------------ ----------- ----------- -----------
Income (loss) before provision for taxes............ (200,000) 2,136,000 39,000 (404,000) (110,000)
Provision for income taxes.......................... 2,000 30,000 -- -- --
----------- ------------ ----------- ----------- -----------
Net (loss) income................................... $ (202,000) $ 2,106,000 $ 39,000 $ (404,000) $ (110,000)
=========== ============ =========== =========== ===========
Net (loss) income per share......................... $ (20.20) $ 210.60 $ 3.90 $ (40.40) $ (11.00)
=========== ============ =========== =========== ===========
Shares used in computing net income (loss) per
share............................................. 10,000 10,000 10,000 10,000 10,000
=========== ============ =========== =========== ===========
Unaudited pro forma data:
Income (loss) before pro forma provision for
income taxes.................................. $ (200,000) $ 2,106,000 $ 39,000 $ (404,000) $ (110,000)
Pro forma provision for (benefit from) income
taxes......................................... (82,000) 863,000 16,000 (166,000) (45,000)
----------- ------------ ----------- ----------- -----------
Income (loss) after pro forma provision for income
taxes............................................. $ (118,000) $ 1,243,000 $ 23,000 $ (238,000) $ (6.50)
=========== ============ =========== =========== ===========
Pro forma net income per share...................... $ (11.80) $ 124.30 $ 2.30 $ (23.80) $ (65.00)
=========== ============ =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-17
<PAGE> 75
ANDATACO
STATEMENT OF SHAREHOLDER'S EQUITY (DEFICIT)
<TABLE>
<CAPTION>
RETAINED
COMMON STOCK EARNINGS
------------------ (ACCUMULATED
SHARES AMOUNT DEFICIT) TOTAL
------- ------- ------------- ----------
<S> <C> <C> <C> <C>
Balance at October 31, 1993........................ 10,000 $2,000 $ 212,000 $ 214,000
Net loss........................................... (202,000) (202,000)
------ ------ ----------- ----------
Balance at October 31, 1994........................ 10,000 2,000 10,000 12,000
Net income......................................... 2,106,000 2,106,000
------ ------ ----------- ----------
Balance at October 31, 1995........................ 10,000 2,000 2,116,000 2,118,000
Dividends.......................................... (2,955,000) (2,955,000)
Net income......................................... 39,000 39,000
------ ------ ----------- ----------
Balance at October 31, 1996........................ 10,000 2,000 (800,000) (798,000)
Net loss (unaudited)............................... (110,000) (110,000)
------ ------ ----------- ----------
Balance at January 31, 1997 (unaudited)............ 10,000 $2,000 $ (910,000) $ (908,000)
====== ====== =========== ==========
</TABLE>
See accompanying notes to financial statements.
F-18
<PAGE> 76
ANDATACO
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED OCTOBER 31, JANUARY 31,
--------------------------------------- -------------------------
1994 1995 1996 1996 1997
----------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income.................................. $ (202,000) $ 2,106,000 $ 39,000 $ (404,000) $ (110,000)
Adjustments to reconcile net (loss) income to cash
provided by (used in) operating activities:
Depreciation and amortization.................. 721,000 440,000 446,000 115,000 166,000
Changes in assets and liabilities:
Accounts receivable............................ (1,971,000) (2,318,000) 492,000 (1,369,000) 310,000
Inventories.................................... 2,282,000 (5,302,000) 3,176,000 3,344,000 (953,000)
Other assets................................... 40,000 (41,000) (70,000) (24,000) (95,000)
Accounts payable............................... 880,000 6,055,000 (4,866,000) (2,838,000) (1,809,000)
Accrued expenses............................... (865,000) 398,000 (461,000) (221,000) 176,000
Other liabilities.............................. 61,000 6,000 (108,000) 10,000 --
Deferred revenue............................... 30,000 (55,000) 74,000 -- 90,000
----------- ----------- ----------- ----------- -----------
Cash provided by (used in) operating
activities............................... 976,000 1,289,000 (1,278,000) (1,387,000) (2,225,000)
----------- ----------- ----------- ----------- -----------
Cash flows from investing activities:
Payments for purchases of property and equipment... (678,000) (680,000) (770,000) (244,000) (121,000)
----------- ----------- ----------- ----------- -----------
Cash used in investing activities.......... (678,000) (680,000) (770,000) (244,000) (121,000)
----------- ----------- ----------- ----------- -----------
Cash flows from financing activities:
Dividends paid..................................... -- -- (2,955,000) -- --
Proceeds from shareholder loan..................... 5,000 550,000 2,000,000 -- --
Payments on shareholder loan....................... -- (120,000) (758,000) (456,000) --
Borrowings on note payable......................... -- 450,000 -- -- --
Payments on notes payable.......................... (150,000) (209,000) (287,000) (78,000) (28,000)
(Payments) proceeds under bank line of credit
agreement (net).................................. (1,422,000) (990,000) 4,508,000 2,693,000 1,947,000
----------- ----------- ----------- ----------- -----------
Cash (used in) provided by financing
activities............................... (1,567,000) (314,000) 2,508,000 2,159,000 1,919,000
----------- ----------- ----------- ----------- -----------
Net (decrease) increase in cash........................ (1,269,000) 295,000 460,000 528,000 (427,000)
Cash at beginning of period............................ 1,279,000 10,000 305,000 305,000 765,000
----------- ----------- ----------- ----------- -----------
Cash at end of period.................................. $ 10,000 $ 305,000 $ 765,000 $ 833,000 $ 338,000
=========== =========== =========== =========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest............................. $ 473,000 $ 898,000 $ 812,000 $ 107,000 $ 212,000
=========== =========== =========== =========== ===========
Cash paid for income taxes......................... $ 1,000 $ 3,000 $ 27,000 $ -- $ --
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-19
<PAGE> 77
ANDATACO
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- THE COMPANY AND A SUMMARY OF ITS SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
ANDATACO (the "Company") is a California Corporation engaged primarily in
the design, manufacture, marketing and service of high availability, business
critical network storage solutions and products.
FINANCIAL STATEMENT PREPARATION
The preparation of financial statements, in conformity with generally
accepted accounting principles, requires management to make assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
REVENUE RECOGNITION
Revenue from the sale of products is recognized as of the date shipments
are made to customers net of an allowance for returns and provision for warranty
costs in excess of those provided for by the original equipment manufacturer.
Revenue related to extended warranty contracts is deferred and is recognized
over the period in which costs are expected to be incurred, based upon
historical evidence, in performing services under the contract. The Company also
contracts with outside vendors to provide service relating to various on-site
warranties which are offered for sale to customers; on-site warranty revenues
and amounts paid in advance to outside service organizations for the entire
warranty period are included in sales and cost of goods sold, respectively.
CONCENTRATION OF CREDIT RISK
The Company grants credit to customers from a broad cross section of
industries, based on an evaluation of the customer's financial condition.
Accounts receivable from sales are generally not collateralized. Credit losses
have been within management's expectations.
INVENTORIES
Inventories are valued at the lower of cost or market, cost being
determined by the first-in, first-out method. The Company's inventory consists
primarily of computer peripheral products, including network storage products,
which are substantially ready for sale.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is provided using
the straight-line basis over the assets' estimated useful lives of five to seven
years. Leasehold improvements are amortized over the shorter of the term of the
lease or the estimated useful life.
LONG-LIVED ASSETS
The Company assesses potential impairments to its long-lived assets when
there is evidence that events or changes in circumstances indicate that the
carrying amount of an asset may not be recovered. An impairment loss would be
recognized when the asset's fair value is less than its carrying amount. No such
impairment losses have been identified by the Company.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount shown for the bank line of credit approximates its fair
values due to the relatively short term nature of this arrangement and to its
adjustable interest rate (Note 3). The carrying amounts
F-20
<PAGE> 78
ANDATACO
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
shown for notes payable and shareholder loan are reasonable approximations of
their fair values based upon the interest rates at which the Company could enter
into similar borrowing arrangements.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred.
INCOME TAXES
Effective October 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income Taxes". Under
SFAS 109, the liability method is used in accounting for income taxes.
Under this method, deferred tax assets and liabilities are determined based
on the differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse.
The Company elected to be taxed as an S corporation whereby the U.S.
Federal and state income tax effects of the Company's activities accrue directly
to its shareholder. The cumulative affect of adopting SFAS No. 109 as of October
1, 1993 was not material to the Company's operations. California imposes a flat
1.5% tax on S corporation earnings.
NEW ACCOUNTING PRONOUNCEMENT
In October 1995, the FASB issued Statement of Financial Accounting
Standards No. 123, "Accounting for Stock- Based Compensation" (SFAS 123). The
Company does not intend to adopt the measurement provisions of SFAS 123 with
regard to employee-based stock compensation, but will adopt the required
disclosure provisions during the year ending October 31, 1997.
NET INCOME (LOSS) PER SHARE
Net income (loss) per share is computed based on the weighted average
number of shares of Common Stock outstanding during the periods presented.
PRO FORMA AMOUNTS (UNAUDITED)
The pro forma amounts presented in the statement of operations reflect the
Company's potential conversion from an S corporation to a C corporation, and the
resultant adjustments for U.S. federal and state income taxes as if the Company
had been taxed as a C corporation rather than an S corporation since inception.
The differences between financial reporting and tax bases of assets and
liabilities are not significant. Such conversion will only take place on
acquisition of all of the outstanding common stock of the Company as
contemplated in the definitive agreement (Note 7).
PRO FORMA NET INCOME (LOSS) PER SHARE (UNAUDITED)
Pro forma net income (loss) per share is computed based on the weighted
average number of shares of common stock outstanding during the periods
presented.
INTERIM RESULTS (UNAUDITED)
The accompanying balance sheet at January 31, 1997 and the related
statements of operations and of cash flows for the three months ended January
31, 1996 and 1997, and the statement of shareholder's deficit for the three
months ended January 31, 1997 are unaudited. In the opinion of management, these
statements have been prepared on the same basis as the audited financial
statements and include all adjustments, consisting only of normal recurring
adjustments, necessary for the fair statement of results of the interim
F-21
<PAGE> 79
ANDATACO
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
periods. The data disclosed in these notes to the financial statements at such
date and for such periods are also unaudited.
NOTE 2 -- COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
<TABLE>
<CAPTION>
OCTOBER 31,
------------------------- JANUARY 31,
1995 1996 1997
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Accounts receivable:
Accounts receivable -- trade....................... $13,744,000 $13,199,000 $12,900,000
Less allowance for doubtful accounts and returns... (272,000) (219,000) (230,000)
----------- ----------- -----------
$13,472,000 $12,980,000 $12,670,000
=========== =========== ===========
Inventory:
Purchased components............................... $ 9,485,000 $ 5,937,000 $ 6,810,000
Work in progress................................... -- 366,000 867,000
Finished goods..................................... 840,000 846,000 425,000
----------- ----------- -----------
$10,325,000 $ 7,149,000 $ 8,102,000
=========== =========== ===========
Property and equipment:
Equipment.......................................... $ 2,093,000 $ 2,784,000 $ 2,905,000
Leasehold improvements............................. 786,000 864,000 864,000
Furniture and fixtures............................. 236,000 261,000 261,000
Vehicles........................................... 174,000 119,000 19,000
----------- ----------- -----------
3,289,000 4,028,000 4,149,000
Less accumulated depreciation and amortization..... 1,150,000 1,565,000 1,731,000
----------- ----------- -----------
$ 2,139,000 $ 2,463,000 $ 2,418,000
=========== =========== ===========
Accrued expenses:
Sales commissions.................................. $ 1,069,000 $ 1,140,000 $ 998,000
Accrued interest................................... 39,000 -- 170,000
Sales tax.......................................... 192,000 -- --
Payroll expenses and related taxes................. 265,000 219,000 99,000
Management bonuses................................. 180,000 -- 132,000
Other.............................................. 75,000 -- 136,000
----------- ----------- -----------
$ 1,820,000 $ 1,359,000 $ 1,535,000
=========== =========== ===========
</TABLE>
EMPLOYEE AGREEMENTS
The Company has recorded a long-term obligation related to ten-year bonus
agreements (the "Agreements") with certain employees. Under the Agreements, a
bonus will be payable to the employee ten years after the date employment
commenced with the Company. Continuous employment during the ten years is a
condition precedent to the Company's obligation to pay the bonus. The bonus is
accrued over the ten year service period; amounts forfeited are credited to
operations. At October 31, 1996 and 1995, the Company has accrued $167,000 and
$275,000, respectively. A net credit of $108,000 and a net charge of $6,000 and
$62,000 are included in the results of operations for the years ended October
31, 1996, 1995 and 1994, respectively.
The Company has a management incentive award plan which provides for the
payment of cash awards or bonuses to officers and other key employees with
respect to any one year in which the Company achieves specified objectives.
There were no awards earned under the plan during the year ended October 31,
1996 and 1994, and $1,300,000 was earned during the year ended October 31, 1995.
F-22
<PAGE> 80
ANDATACO
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
In September 1996, the Company entered into an employment agreement with
one of its executive officers. Pursuant to the agreement the shareholder of the
Company is obligated to issue 50 shares of common stock to the officer. The
number of shares to be issued are subject to adjustment to protect against
dilution prior to vesting. The shares will vest at a rate of 25% every six
months over a period of two years. In the event that 10% or more of the
Company's common stock is sold, the shares granted will vest immediately. In the
event employment is terminated, the shares will vest immediately and will be
repurchased by the Company at an established fair value.
NOTE 3 -- BANK LINE OF CREDIT
The Company has a revolving line of credit with a bank which provides for
it to borrow the lesser of (i) $10,000,000 or (ii) 75 percent of eligible
domestic accounts receivable plus 25 percent of eligible inventory at the bank's
prime rate plus 0.75 percent (9.0 percent at October 31, 1996). The revolving
line of credit was renewed in January 1997 for a thirteen month period. The line
is secured by all of the Company's property and accounts receivable and is
guaranteed by the Company's shareholder. As of October 31, 1996 and 1995, there
was $7,053,000 and $2,545,000, respectively, outstanding. The credit agreement
includes covenants which, among other things, require the Company to maintain
stated minimum working capital and net worth amounts plus specific liquidity and
long-term solvency ratios. The Company was in compliance with all covenants of
the renewed credit agreement at October 31, 1996.
In March 1994 the shareholder of the Company issued a warrant granting the
bank the right to purchase a 1 percent interest in the Company from him at an
exercise price of $350,000 in consideration for covenant amendments to the line
of credit agreement. The warrant expires in March 1999. The value of the warrant
has been determined by management not to be material.
NOTE 4 -- NOTES PAYABLE
<TABLE>
<CAPTION>
OCTOBER 31, JANUARY
---------------------- 31,
1995 1996 1997
--------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C>
Notes payable are comprised as follows:
Note payable to an individual due on demand,
unsecured and with interest at 7 percent per annum
payable quarterly.................................. $ 226,000 $ 52,000 $ 52,000
Note payable to a bank, secured by certain assets
payable in monthly instalments of $9,375 principal
plus interest at the bank's prime rate plus 1%
(9.25 percent at October 31, 1996) through November
1998............................................... 367,000 254,000 226,000
--------- --------- ---------
593,000 306,000 278,000
Less current portion................................. (339,000) (164,000) (164,000)
--------- --------- ---------
$ 254,000 $ 142,000 $ 114,000
========= ========= =========
</TABLE>
Maturities of the Company's debt pursuant to its term are $164,000,
$113,000 and $29,000 in 1997, 1998 and 1999, respectively.
NOTE 5 -- COMMITMENTS AND CONTINGENCIES
The Company currently conducts sales operations in fourteen facilities
throughout the United States. Certain facilities are leased from various
parties, including related parties, under noncancellable operating leases that
expire at various times through March 2003 (see Note 6).
F-23
<PAGE> 81
ANDATACO
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum rental commitments under non-cancelable operating leases,
inclusive of obligation to shareholder disclosed below, are reflected in the
following table:
<TABLE>
<CAPTION>
YEAR ENDING
OCTOBER 31,
-----------
<S> <C>
1997......................................................... $ 645,000
1998......................................................... 484,000
1999......................................................... 400,000
2000......................................................... 348,000
2001 and thereafter.......................................... 799,000
----------
$2,676,000
==========
</TABLE>
Total rent expense was $853,000, $687,000 and $613,000 for the years ended
October 31, 1996, 1995 and 1994, respectively.
The Company may be subject to various claims and legal proceedings in the
ordinary course of conducting its business. In the opinion of management, the
liability associated with the resolution of such matters, if any, will not have
a material adverse effect on the Company's financial position or results of
operations or cash flows.
NOTE 6 -- CERTAIN RELATED PARTY TRANSACTIONS
The Company currently leases its corporate headquarters from an entity
owned by the president and sole shareholder of the Company. The Company paid
this entity approximately $330,000 during each of the years ended October 31,
1996, 1995 and 1994, under the terms of the lease agreement.
The Company paid its president and sole shareholder $1,200,000, $2,251,000
and $1,256,000 during the years ended October 31, 1996, 1995 and 1994,
respectively, for his services. Included in the fiscal year 1995 compensation
was a bonus for $1,000,000. No bonus was paid for fiscal year 1996.
The shareholder loan is unsecured, due on demand, with interest payable at
9 percent per annum. This loan is subordinate to the bank line of credit. The
shareholder has agreed not to demand payment on this amount during the next
fiscal year; consequently, this borrowing is classified as long term.
NOTE 7 -- SUBSEQUENT EVENT (UNAUDITED)
On February 25, 1997, IPL Systems Inc. (IPL) and Andataco entered into a
one-year OEM Agreement. Under this arrangement, the Company is a non-exclusive
reseller of certain IPL products and the Company is committed to purchase
$1,500,000 of product by March 31, 1997 and an additional $1,500,000 of product
by April 30, 1997.
On March 3, 1997, IPL signed a definitive agreement with the Company for
the acquisition of all of the outstanding common stock of the Company. For
accounting purposes the acquisition will be treated as a recapitalization of the
Company with the Company as the acquirer (reverse acquisition). The acquisition
is subject to various conditions, including the approval of the transaction by
the existing shareholders of IPL.
F-24
<PAGE> 82
ANNEX LIST
<TABLE>
<S> <C> <C>
Annex I Agreement and Plan of Merger and Reorganization
Annex II Opinion of Needham & Company, Inc.
Annex III IPL's 1996 Annual Report to Stockholders
Annex IV IPL 1996 Consolidated Equity Incentive Plan
</TABLE>
<PAGE> 83
ANNEX I
================================================================================
AGREEMENT AND PLAN OF MERGER AND REORGANIZATION
AMONG:
IPL SYSTEMS, INC.,
A MASSACHUSETTS CORPORATION;
IPL ACQUISITION CORP.,
A DELAWARE CORPORATION;
ANDATACO,
A CALIFORNIA CORPORATION; AND
W. DAVID SYKES,
A SHAREHOLDER OF ANDATACO
---------------------------------------
DATED AS OF FEBRUARY 28, 1997
---------------------------------------
================================================================================
<PAGE> 84
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
SECTION 1. DESCRIPTION OF TRANSACTION.................................................. 1
1.1 Merger of Merger Sub into the Company...................................... 1
1.2 Effect of the Merger....................................................... 1
1.3 Closing; Effective Date.................................................... 1
1.4 Articles of Incorporation and Bylaws; Directors and Officers............... 2
1.5 Conversion of Shares....................................................... 2
1.6 Closing of the Company's Transfer Books.................................... 3
1.7 Exchange of Certificates................................................... 3
1.8 Indemnity Shares........................................................... 4
1.9 Tax Consequences........................................................... 4
1.10 Further Action............................................................. 5
SECTION 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE SHAREHOLDER........... 5
2.1 Due Organization; No Subsidiaries; Etc..................................... 5
2.2 Articles of Incorporation and Bylaws; Records.............................. 5
2.3 Capitalization............................................................. 5
2.4 Financial Statements....................................................... 6
2.5 Absence of Changes......................................................... 6
2.6 Title to Assets............................................................ 7
2.7 Accounts Receivable; Loans and Advances.................................... 7
2.8 Equipment; Leasehold....................................................... 8
2.9 Proprietary Assets......................................................... 8
2.10 Contracts.................................................................. 8
2.11 No Undisclosed Liabilities................................................. 10
2.12 Compliance with Legal Requirements......................................... 10
2.13 Governmental Authorizations................................................ 10
2.14 Tax Matters................................................................ 10
2.15 Employee and Labor Matters; Benefit Plans.................................. 11
2.16 Environmental Matters...................................................... 12
2.17 Insurance.................................................................. 13
2.18 Related Party Transactions................................................. 13
2.19 Legal Proceedings; Orders.................................................. 13
2.20 Authority; Binding Nature of Agreement..................................... 13
2.21 Non-Contravention; Consents and Notices.................................... 13
2.22 Full Disclosure............................................................ 14
2.23 Finder's Fee............................................................... 14
SECTION 3. REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB..................... 14
3.1 Due Organization, Etc. .................................................... 14
3.2 Capitalization, Etc. ...................................................... 15
3.3 SEC Filings; Financial Statements.......................................... 15
3.4 Disclosure................................................................. 16
3.5 Absence of Changes......................................................... 16
3.6 Title to Assets............................................................ 17
3.7 Bank Accounts; Accounts Receivable; Loans and Advances..................... 17
3.8 Equipment; Leasehold....................................................... 18
3.9 Proprietary Assets......................................................... 18
3.10 Contracts.................................................................. 19
3.11 No Undisclosed Liabilities................................................. 20
3.12 Compliance with Legal Requirements......................................... 20
3.13 Governmental Authorizations................................................ 20
3.14 Tax Matters................................................................ 20
3.15 Employee and Labor Matters; Benefit Plans.................................. 21
</TABLE>
<PAGE> 85
TABLE OF CONTENTS -- (CONTINUED)
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
3.16 Environmental Matters...................................................... 22
3.17 Insurance.................................................................. 22
3.18 Related Party Transactions................................................. 23
3.19 Legal Proceedings; Orders.................................................. 23
3.20 Authority; Binding Nature of Agreement..................................... 23
3.21 Non-Contravention; Consents and Notices.................................... 23
3.22 Vote Required.............................................................. 24
3.23 Company Action............................................................. 24
3.24 Fairness Opinion........................................................... 24
3.25 Finder's Fee............................................................... 24
3.26 Full Disclosure............................................................ 24
SECTION 4. CERTAIN COVENANTS OF THE COMPANY............................................ 25
4.1 Access and Investigation................................................... 25
4.2 Operation of the Company's Business........................................ 25
4.3 Notification; Updates to Company Disclosure Schedule....................... 26
4.4 No Solicitation............................................................ 27
4.5 Tax Representation Letter.................................................. 27
4.6 Independent Directors...................................................... 27
SECTION 5. CERTAIN COVENANTS OF PARENT................................................. 27
5.1 Access and Investigation................................................... 27
5.2 Operation of Parent's Business............................................. 27
5.3 Notification; Updates to Parent Disclosure Schedule........................ 29
5.4 No Solicitation............................................................ 29
5.5 Proxy Statement............................................................ 30
5.6 Parent Shareholders' Meeting............................................... 30
5.7 Tax Representation Letters................................................. 31
5.8 Tax Distribution to Company Shareholders................................... 31
5.9 Parent Consultant.......................................................... 31
SECTION 6. ADDITIONAL COVENANTS OF THE PARTIES......................................... 32
6.1 Filings and Consents....................................................... 32
6.2 Public Announcements....................................................... 32
6.3 Best Efforts............................................................... 32
6.4 Regulatory Approvals....................................................... 32
SECTION 7. CONDITIONS PRECEDENT TO OBLIGATIONS OF PARENT AND MERGER SUB................ 33
7.1 Accuracy of Representations................................................ 33
7.2 Performance of Covenants................................................... 33
7.3 No Material Adverse Effect................................................. 33
7.4 Compliance Certificate..................................................... 33
7.5 Shareholder Approval....................................................... 33
7.6 Consents................................................................... 33
7.7 Tax Representation Letter; Continuity of Interest Certificates............. 33
7.8 Legal Opinion.............................................................. 33
7.9 Tax Opinion................................................................ 33
7.10 Stock Representation Letter................................................ 33
7.11 Imperial Bank Credit Line Amendment........................................ 33
7.12 No Restraints.............................................................. 34
7.13 No Governmental Litigation................................................. 34
7.14 No Other Litigation........................................................ 34
7.15 HSR Act.................................................................... 34
7.16 Lock-Up Agreement.......................................................... 34
7.17 Escrow Agreement........................................................... 34
7.18 Noncompetition Agreement................................................... 34
</TABLE>
<PAGE> 86
TABLE OF CONTENTS -- (CONTINUED)
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
7.19 Nasdaq NMS Listing......................................................... 34
SECTION 8. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE COMPANY.......................... 34
8.1 Accuracy of Representations................................................ 34
8.2 Performance of Covenants................................................... 35
8.3 No Material Adverse Effect................................................. 35
8.4 Compliance Certificate..................................................... 35
8.5 Shareholder Approval....................................................... 35
8.6 Consents................................................................... 35
8.7 Legal Opinion.............................................................. 35
8.8 Tax Representation Letter.................................................. 35
8.9 Tax Opinion................................................................ 35
8.10 Employment Agreement....................................................... 35
8.11 No Restraints.............................................................. 35
8.12 No Governmental Litigation................................................. 35
8.13 No Other Litigation........................................................ 35
8.14 HSR Act.................................................................... 36
8.15 Tax Distribution to Company Shareholders................................... 36
8.16 Noncompetition Agreement................................................... 36
8.17 Nasdaq NMS Listing......................................................... 36
SECTION 9. TERMINATION................................................................. 36
9.1 Termination................................................................ 36
9.2 Effect of Termination...................................................... 36
9.3 Fees and Expenses; Termination Fees........................................ 37
SECTION 10. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; INDEMNIFICATION................ 37
10.1 Survival of Company Representations and Warranties......................... 37
10.2 Survival of Parent and Merger Sub Representations and Warranties........... 37
10.3 Indemnification by Company Shareholders.................................... 38
10.4 Indemnification by Parent and Merger Sub................................... 38
10.5 Valuation of Indemnity Shares.............................................. 38
10.6 Notice; Defense of Claim................................................... 38
10.7 Further Limitations on Indemnification..................................... 39
10.8 Issuance of Parent Indemnity Shares to Satisfy Claims for Damages.......... 40
SECTION 11. REGISTRATION OF THE MERGER SHARES; COMPLIANCE WITH THE SECURITIES ACT...... 41
11.1 Registration Procedures and Expenses....................................... 41
11.2 Transfer of Securities After Registration.................................. 42
11.3 Indemnification............................................................ 42
11.4 Contribution............................................................... 43
11.5 Information Available...................................................... 43
11.6 Successors and Assigns..................................................... 44
SECTION 12. MISCELLANEOUS PROVISIONS................................................... 44
12.1 Further Assurances......................................................... 44
12.2 Attorneys' Fees............................................................ 44
12.3 Notices.................................................................... 44
12.4 Time of the Essence........................................................ 45
12.5 Governing Law; Venue....................................................... 45
12.6 Successors and Assigns..................................................... 45
12.7 Remedies Cumulative; Specific Performance.................................. 45
12.8 Waiver..................................................................... 45
12.9 Amendments................................................................. 46
12.10 Severability............................................................... 46
</TABLE>
<PAGE> 87
TABLE OF CONTENTS -- (CONTINUED)
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
12.11 Disclosure Schedules....................................................... 46
12.12 Entire Agreement........................................................... 46
12.13 Construction............................................................... 46
12.14 Headings................................................................... 46
12.15 Counterparts............................................................... 47
</TABLE>
Schedule A -- List of IPL shareholders, directors and executive officers
delivering proxies
Exhibit A -- Certain Definitions
<PAGE> 88
AGREEMENT AND PLAN
OF MERGER AND REORGANIZATION
THIS AGREEMENT AND PLAN OF MERGER AND REORGANIZATION (the "Agreement") is
made and entered into as of February 28, 1997, by and among IPL SYSTEMS, INC., a
Massachusetts corporation ("Parent"), IPL ACQUISITION CORP., a Delaware
corporation and a wholly owned subsidiary of Parent ("Merger Sub"), ANDATACO, a
California corporation (the "Company"), and W. DAVID SYKES, a shareholder of the
Company (the "Shareholder"). Certain capitalized terms used in this Agreement
are defined in Exhibit A.
RECITALS
A. Parent, Merger Sub and the Company intend to effect a merger of Merger
Sub into the Company (the "Merger") in accordance with this Agreement, the
Delaware General Corporation Law (the "DGCL") and the California General
Corporation Law (the "CGCL"). Upon consummation of the Merger, Merger Sub will
cease to exist, and the Company will become a wholly owned subsidiary of Parent.
B. It is intended that the Merger qualify as a tax-free reorganization
within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as
amended (the "Code").
C. This Agreement has been adopted and approved by the respective boards of
directors of Parent, Merger Sub and the Company, and by the Company
Shareholders.
D. The directors, executive officers and shareholders of Parent listed on
Schedule A have concurrently herewith executed and delivered to the Company
irrevocable proxies to vote all shares of voting stock held by such persons in
favor of the approval of this Agreement, the Merger and the transactions
contemplated thereby. Such irrevocable proxies have not been modified or revoked
and are in full force and effect.
AGREEMENT
The parties to this Agreement, intending to be legally bound, agree as
follows:
SECTION 1. DESCRIPTION OF TRANSACTION
1.1 MERGER OF MERGER SUB INTO THE COMPANY. Upon the terms and subject to
the conditions set forth in this Agreement, on the Effective Date (as defined in
Section 1.3), Merger Sub shall be merged with and into the Company, and the
separate existence of Merger Sub shall cease. The Company will continue as the
surviving corporation in the Merger (the "Surviving Corporation").
1.2 EFFECT OF THE MERGER. The Merger shall have the effects set forth in
this Agreement and in the applicable provisions of the CGCL and the DGCL.
1.3 CLOSING; EFFECTIVE DATE. The consummation of the transactions
contemplated by this Agreement (the "Closing") shall take place at the offices
of Cooley Godward LLP, 4365 Executive Drive, Suite 1100, San Diego, California
92121 at 10:00 a.m. (PST) on July 31, 1997, or at such other place, time and
date as the parties may designate, but in any event shall be no later than the
second business day after the date that all of the conditions set forth in
Sections 7 and 8 have been satisfied or waived (the "Closing Date").
Contemporaneously with the Closing, a properly executed agreement of merger
conforming to the requirements of the CGCL and the DGCL (the "Agreement of
Merger") shall be filed with the Secretary of State of the State of California
and a copy of such Agreement of Merger shall be filed with the Secretary of
State of the State of Delaware. The Merger shall take effect at the time the
Agreement of Merger is filed with and accepted by the Secretary of State of the
State of California and the Secretary of State of the State of Delaware (the
"Effective Date").
1
<PAGE> 89
1.4 ARTICLES OF INCORPORATION AND BYLAWS; DIRECTORS AND OFFICERS. Unless
otherwise agreed to in writing by the Company and Parent prior to the Effective
Date:
(a) the Articles of Incorporation of the Surviving Corporation shall
be amended and restated as of the Effective Date to conform to Exhibit B;
(b) the Bylaws of the Surviving Corporation shall be amended and
restated as of the Effective Date to conform to the Bylaws of the Company
as in effect immediately prior to the Effective Date; and
(c) the directors and officers of the Surviving Corporation
immediately after the Effective Date shall be the individuals identified on
Exhibit C.
1.5 CONVERSION OF SHARES.
(a) Subject to Section 1.7(b), on the Effective Date, by virtue of the
Merger and without any further action on the part of Parent, Merger Sub, the
Company or the Company Shareholders:
(i) subject to Section 1.5(c), each share of Company Common Stock
deemed outstanding immediately prior to the Effective Date shall be
converted into the right to receive that number of shares of Parent Common
Stock that is equal to the "Exchange Ratio" (as defined in Section
1.5(b)(ii)); and
(ii) each share of Common Stock, $.01 par value per share, of Merger
Sub outstanding immediately prior to the Effective Date shall be converted
into one share of Common Stock of the Surviving Corporation.
(b) For purposes of this Agreement:
(i) the term "Merger Shares" shall mean shares of Parent Common
Stock to be issued to the Company Shareholders in the Merger and shall
be determined in accordance with the following formula:
MERGER SHARES = X X
-
------
0.252
where "X" is equal to (1) the aggregate number of shares of Parent
Common Stock outstanding immediately prior to the Effective Date, plus
(2) the total number of shares of Parent Common Stock subject to
outstanding options, warrants or other rights to acquire capital stock
of Parent or issuable pursuant to securities or instruments convertible
into or exchangeable for shares of capital stock of Parent outstanding
immediately prior to the Effective Date; and
(ii) the term "Exchange Ratio" shall mean the number of shares of
Parent Common Stock into which each share of Company Common Stock is
converted in the Merger and shall be equal to (1) the total number of
Merger Shares divided by (2) the total number of shares of Company
Common Stock deemed outstanding immediately prior to the Effective Date.
For the purposes of this Section 1.5(b)(ii), all options, warrants or
other rights to acquire capital stock of the Company or issuable
pursuant to securities or instruments convertible into or exchangeable
for shares of capital stock of the Company outstanding immediately prior
to the Effective Date shall be deemed outstanding Common Stock of the
Company; provided, however, that twenty-five percent (25%) of the up to
one hundred (100) shares of Common Stock of the Company issuable upon
exercise of those certain warrants of the Company issued to Imperial
Bank shall not be deemed outstanding Common Stock of the Company to the
extent such warrants are outstanding on the Effective Date.
(c) If, between the date of this Agreement and the Effective Date, the
shares of Company Common Stock or Parent Common Stock deemed outstanding
are changed into a different number or class of shares by reason of any
stock dividend, subdivision, reclassification, reorganization, stock split,
combination or similar transaction, the total number of Merger Shares shall
be appropriately adjusted, provided that any such adjustment shall in all
events result in the Company Shareholders immediately prior to the
Effective Date receiving no less than the pro rata percentage of Merger
Shares that would have been received by such shareholders prior to any such
adjustment.
2
<PAGE> 90
(d) On the Effective Date, all rights with respect to Company Common
Stock under Company Options and Company Warrants that are then outstanding
shall be converted into and become rights with respect to Parent Common
Stock, and Parent shall assume each Company Option and Company Warrant in
accordance with the terms (as in effect as of the date hereof) of the stock
option plan or other agreement, as the case may be, under which it was
issued and the stock option agreement or warrant agreement, as the case may
be, by which it is evidenced. From and after the Effective Date, (i) each
Company Option and Company Warrant assumed by Parent may be exercised
solely for shares of Parent Common Stock, (ii) the number of shares of
Parent Common Stock subject to each Company Option and Company Warrant
shall be equal to the number of shares of Company Common Stock subject to
such Company Option and Company Warrant immediately prior to the Effective
Date multiplied by the Exchange Ratio, rounding down to the nearest whole
share (with cash, less the applicable exercise price, being payable for any
fraction of a share), (iii) the per share exercise price under each such
Company Option and Company Warrant shall be adjusted by dividing the per
share exercise price under each such Company Option and Company Warrant by
the Exchange Ratio and rounding up to the nearest cent and (iv) any
restriction on the exercise of any Company Option or Company Warrant shall
continue in full force and effect and the term, exercisability, vesting
schedule and other provisions of such Company Option and Company Warrant
shall otherwise remain unchanged; provided, however, that each such Company
Option and Company Warrant shall, in accordance with its terms, be subject
to further adjustment as appropriate to reflect any stock split, stock
dividend, subdivision, reclassification, reorganization, stock split,
combination or similar transaction subsequent to the Effective Date. The
Company shall take all actions that may be necessary (under the benefits
plan or other agreements pursuant to which Company Options and Company
Warrants are outstanding) to effectuate the provisions of this Section
1.5(d) and to ensure that, from and after the Effective Date, holders of
Company Options and Company Warrants have no rights with respect thereto
other than those specifically provided herein.
1.6 CLOSING OF THE COMPANY'S TRANSFER BOOKS. On the Effective Date, (a)
all certificates representing shares of Company Common Stock outstanding
immediately prior to the Effective Date shall automatically be canceled and
retired and shall cease to exist, and all holders of certificates representing
shares of Company Common Stock that were outstanding immediately prior to the
Effective Date shall cease to have any rights as shareholders of the Company,
and (b) the stock transfer books of the Company shall be closed with respect to
all shares of such Company Common Stock outstanding immediately prior to the
Effective Date. No further transfer of any such shares of Company Common Stock
shall be made on such stock transfer books after the Effective Date. If, after
the Effective Date, a valid certificate previously representing any of such
shares of Company Common Stock (a "Company Stock Certificate") is presented to
the Surviving Corporation or Parent, such Company Stock Certificate shall be
canceled and shall be exchanged as provided in Section 1.7.
1.7 EXCHANGE OF CERTIFICATES.
(a) EXCHANGE PROCEDURES. On or as soon as practicable after the
Effective Date, Parent will send or cause to be sent to the holders of
Company Stock Certificates (i) a letter of transmittal in customary form
and containing such provisions as Parent may reasonably specify, and (ii)
instructions for use in effecting the surrender of Company Stock
Certificates in exchange for certificates representing Parent Common Stock.
Subject to Section 1.7(b), upon surrender of a Company Stock Certificate
for exchange, together with a duly executed letter of transmittal and such
other documents as may be reasonably required by Parent, (1) the holder of
such Company Stock Certificate shall be entitled to receive in exchange
therefor a certificate representing the number of shares of Parent Common
Stock that such holder has the right to receive pursuant to Section
1.5(a)(i), and (2) the Company Stock Certificate so surrendered shall be
canceled. Until surrendered as contemplated by this Section 1.7(a), each
Company Stock Certificate shall be deemed, from and after the Effective
Date, to represent only the right to receive shares of Parent Common Stock
(and cash in lieu of any fractional share of Parent Common Stock as
contemplated by Section 1.7(b)). If any Company Stock Certificate shall
have been lost, stolen or destroyed, Parent may, in its discretion and as a
condition precedent to the issuance of any certificate representing Parent
Common Stock, require the owner of such lost, stolen or destroyed Company
Stock
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Certificate to provide an appropriate affidavit of loss and indemnity
agreement against any claim that may be made against Parent or the
Surviving Corporation with respect to such Company Stock Certificate.
(b) FRACTIONAL SHARES. No fractional shares of Parent Common Stock
shall be issued in connection with the Merger, and no certificates for any
such fractional shares shall be issued. In lieu of such fractional shares,
any holder of Company Common Stock who would otherwise be entitled to
receive a fraction of a share of Parent Common Stock (after aggregating all
fractional shares of Parent Common Stock issuable to such holder) shall,
upon surrender of such holder's Company Stock Certificate(s), be paid in
cash the dollar amount (rounded to the nearest whole cent), without
interest, determined by multiplying such fraction by the closing sales
price of a share of Parent Common Stock as reported on the Nasdaq National
Market on the day of Closing (and if such day is not a trading day, then
the last trading day immediately preceding the Closing Date).
(c) LEGENDS. The shares of Parent Common Stock to be issued in the
Merger shall be characterized as "restricted securities" for purposes of
Rule 144 under the Securities Act, and each certificate representing any of
such shares shall bear a legend identical or similar in effect to the
following legend (together with any other legend or legends required by
applicable state securities laws or otherwise):
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "ACT"), AND MAY NOT BE OFFERED, SOLD OR OTHERWISE
TRANSFERRED, ASSIGNED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER
THE ACT OR IN COMPLIANCE WITH AN EXEMPTION FROM SUCH REGISTRATION REQUIREMENTS.
(d) NO LIABILITY. Neither Parent nor the Surviving Corporation shall
be liable to any holder or former holder of Company Common Stock for any
shares of Parent Common Stock (or dividends or distributions with respect
thereto), or for any cash amounts, delivered to any public official
pursuant to any applicable abandoned property, escheat or similar law.
1.8 INDEMNITY SHARES.
(a) SHAREHOLDERS INDEMNITY SHARES. Upon the Effective Date, Parent
shall withhold ten percent (10%) of that number of Merger Shares (the
"Shareholders Indemnity Shares") to be issued to the Company Shareholders
pursuant to Section 1.5(a) (rounded down to the nearest whole share to be
issued to the Company Shareholders). The Shareholders Indemnity Shares
shall be delivered to the Escrow Agent as collateral for the Company's and
Company Shareholders' indemnification obligations set forth in Section
10.3. The Shareholders Indemnitee Shares will be represented by a
certificate or certificates issued in the names of the Company Shareholders
pro rata for each Company Shareholder and, except as set forth in Section
10, shall be held in escrow by the Escrow Agent to satisfy any claims made
on or before the first anniversary of the Effective Date (the "Escrow
Period"). The administration by the Escrow Agent of the Shareholders
Indemnity Shares during the Escrow Period shall be conducted pursuant to
the terms of an escrow agreement in the form of Exhibit D among Parent, the
Company Shareholders, Escrow Agent and W. David Sykes as representative for
the Company Shareholders (the "Shareholders' Representative").
(b) PARENT INDEMNITY SHARES. On or prior to the Effective Time, Parent
shall have reserved, and, except as set forth in Section 10, shall at all
times maintain in reserve during the Escrow
Period, that number of authorized but unissued shares of Parent Common
Stock equal to the number of Shareholders Indemnity Shares withheld
pursuant to Section 1.8(a) (the "Parent Indemnity Shares"). The Parent
Indemnity Shares shall be held to satisfy the Parent's and Merger Sub's
indemnification obligations set forth in Section 10.4.
1.9 TAX CONSEQUENCES. For federal income tax purposes, the Merger is
intended to constitute a reorganization within the meaning of Section 368(a) of
the Code. The parties to this Agreement hereby adopt
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this Agreement as a "plan of reorganization" within the meaning of Sections
1.368-2(g) and 1.368-3(a) of the United States Treasury Regulations.
1.10 FURTHER ACTION. If, at any time after the Effective Date, any
further action is determined by Parent to be necessary to carry out the purposes
of this Agreement or to vest the Surviving Corporation or Parent with full
right, title and possession of and to all rights and property of Merger Sub and
the Company, the officers and directors of the Surviving Corporation and Parent
shall be fully authorized (in the name of Merger Sub, in the name of the Company
and otherwise) to take such action.
SECTION 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE SHAREHOLDER
The Company and the Shareholder, jointly and severally, represent and
warrant to Parent and Merger Sub that, except as set forth in the disclosure
schedule prepared by the Company in accordance with the requirements of Section
12.11 and delivered by the Company to Parent on the date of this Agreement (the
"Company Disclosure Schedule"):
2.1 DUE ORGANIZATION; NO SUBSIDIARIES; ETC.
(a) The Company is a corporation duly organized, validly existing and
in good standing under the laws of the State of California with full
corporate power and authority to (i) conduct its business in the manner in
which it is now being conducted, (ii) own and use its assets in the manner
in which its assets are now being owned and used and (iii) perform its
obligations under all Material Company Contracts by which it is bound. The
Company has no subsidiaries. Other than changes in the conduct of the
Company's business proposed to be made by the Company in connection with
the Merger, the Company does not have any plans to change, in any material
respect, a line of its business.
(b) The Company is qualified to do business as a foreign corporation,
and is in good standing, under the laws of the jurisdictions set forth in
Part 2.1(b) of the Company Disclosure Schedule, which are all the
jurisdictions where the nature of its business requires such qualification
and where the failure to be so qualified would have a Material Adverse
Effect on the Company.
2.2 ARTICLES OF INCORPORATION AND BYLAWS; RECORDS. The Company has
delivered to Parent accurate and complete copies of: (1) the Company's articles
of incorporation and bylaws as currently in effect, including all amendments
thereto; (2) the stock records of the Company; and (3) the minutes and other
records of the meetings and other proceedings (including any actions taken by
written consent or otherwise without a meeting) of the shareholders of the
Company, the Board of Directors of the Company and all committees of the Board
of Directors of the Company. The Company is not in violation of any of the
provisions of its articles of incorporation or bylaws. The books of account,
stock records, minute books and other records of the Company are accurate and
complete in all material respects, and have been maintained in accordance with
prudent business practices.
2.3 CAPITALIZATION. The authorized capital stock of the Company consists
of: (i) 25,000 shares of Company Common Stock, no par value, of which 10,000
shares have been issued and are outstanding. Part 2.3 of the Company Disclosure
Schedule sets forth the names of the Company Shareholders and the number of
shares and certificate numbers of Company Common Stock owned of record by each
of such shareholders. All of the outstanding shares of Company Common Stock have
been duly authorized and validly issued, and are fully paid and nonassessable,
and none of such shares is subject to any repurchase option or restriction on
transfer other than restrictions imposed by federal or state securities laws.
There are no outstanding subscriptions, options, calls, warrants or other rights
(whether or not currently exercisable) to acquire any shares of the capital
stock or other securities of the Company. All outstanding shares of Company
Common Stock have been issued in compliance with all applicable securities laws
and other applicable Legal Requirements and all requirements set forth in
applicable Company Contracts. The Company has never repurchased, redeemed or
otherwise reacquired any shares of capital stock or other securities.
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2.4 FINANCIAL STATEMENTS.
(a) The Company has delivered to Parent the following financial
statements and notes (collectively, the "Company Financial Statements"):
(i) the audited balance sheets of the Company as of October 31,
1996 and 1995, and the related audited statements of income, statements
of shareholders' equity and statements of cash flows of the Company for
the years then ended, together with the notes thereto and the
unqualified report and opinion of Price Waterhouse LLP relating thereto;
and
(ii) The unaudited balance sheet of the Company as of January 31,
1997 (the "Unaudited Interim Balance Sheet"), and the related unaudited
statement of income of the Company for the two-month period then ended.
(b) The Company Financial Statements present fairly the financial
position of the Company as of the respective dates thereof and the results
of operations and cash flows of the Company for the periods covered
thereby. The Company Financial Statements have been prepared in accordance
with generally accepted accounting principles applied on a consistent basis
throughout the periods covered (except that the financial statements
referred to in Section 2.4(a)(ii) do not contain footnotes and are subject
to normal and recurring year-end audit adjustments, which will not,
individually or in the aggregate, be material in magnitude).
2.5 ABSENCE OF CHANGES. Since October 31, 1996:
(a) there has not been any material adverse change in the Company's
business, condition, assets, liabilities, operations or financial
performance, and, to the best knowledge of the Company, no event has
occurred that will, or could reasonably be expected to, have a Material
Adverse Effect on the Company;
(b) there has not been any material loss, damage or destruction to any
of the Company's assets (whether or not covered by insurance);
(c) the Company has not declared, accrued, set aside or paid any
dividend or made any other distribution in respect of any shares of capital
stock and has not repurchased, redeemed or otherwise reacquired any shares
of capital stock or other securities;
(d) the Company has not sold, issued or authorized the issuance of (i)
any capital stock or other security (except for Company Common Stock issued
upon the exercise of outstanding Company Options or Company Warrants), (ii)
any option, call, warrant or right to acquire, or otherwise relating to,
any capital stock or any other security (except for Company Options and
Company Warrants described in Part 2.3 of the Company Disclosure Schedule),
or (iii) any instrument convertible into or exchangeable for any capital
stock or other security;
(e) there has been no amendment to the Company's articles of
incorporation or bylaws, and the Company has not effected or been a party
to any Company Acquisition Transaction, recapitalization, reclassification
of shares, stock split, reverse stock split or similar transaction;
(f) the Company has not amended or waived any of its rights under, or
permitted the acceleration of vesting under (i) any provision of any
agreement evidencing any outstanding Company Option or Company Warrant, or
(ii) any restricted stock purchase agreement;
(g) the Company has not formed any subsidiary or acquired any equity
interest or other interest in any other Entity;
(h) the Company has not made any capital expenditure which, when added
to all other capital expenditures made by the Company since October 31,
1996, exceeds $100,000 in the aggregate;
(i) the Company has not (i) entered into any Material Company Contract
(as defined in Section 2.10(a)), or (ii) amended or prematurely terminated,
or waived any material right or remedy under, any Material Company Contract
to which it is or was a party or under which it has or had any material
rights or obligations;
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(j) the Company has not (i) acquired, leased or licensed any right or
other asset from any other Person, (ii) sold or otherwise disposed of, or
leased or licensed, any right or other asset to any other Person, or (iii)
waived or relinquished any right, except for immaterial rights or other
immaterial assets acquired, leased, licensed or disposed of in the ordinary
course of business and consistent with the Company's past practices;
(k) the Company has not written off as uncollectible, or established
any reserve with respect to, any account receivable or other indebtedness
in excess of $100,000 individually or in the aggregate;
(l) the Company has not made any pledge of any of its assets or
otherwise permitted any of its assets to become subject to any Encumbrance,
except for pledges of assets valued at $100,000 or less, individually or in
the aggregate, made in the ordinary course of business and consistent with
the Company's past practices;
(m) the Company has not (i) lent money to any Person, or (ii) incurred
or guaranteed any indebtedness for borrowed money in excess of $100,000
individually or in the aggregate;
(n) the Company has not (i) established, adopted or amended any
Employee Benefit Plan, (ii) paid any bonus or made any profit-sharing or
similar payment to, or increased the amount of the wages, salary,
commissions, fringe benefits or other compensation or remuneration payable
to, any of its directors, officers or employees, or (iii) hired any new
employee except in the ordinary course of business and consistent with past
practices;
(o) the Company has not changed any of its methods of accounting or
accounting practices in any respect;
(p) the Company has not made any Tax election;
(q) the Company has not commenced or settled any Legal Proceeding;
(r) the Company has not entered into any material transaction or taken
any other material action outside the ordinary course of business or
inconsistent with its past practices; and
(s) the Company has not agreed or committed to take any of the actions
referred to in clauses "(c)" through "(r)" above.
2.6 TITLE TO ASSETS.
(a) The Company owns, and has good and valid title to, all assets
purported to be owned by it, including all of the assets reflected in the
Company Financial Statements and all other assets reflected in the
Company's books and records as being owned by the Company. All of said
assets are owned by the Company free and clear of any liens or other
Encumbrances, except for (i) any lien for current taxes not yet due and
payable, and (ii) minor liens that have arisen in the ordinary course of
business and that do not (in any case or in the aggregate) materially
detract from the value of the assets subject thereto or materially impair
the operations of the Company.
(b) Part 2.6(b) of the Company Disclosure Schedule identifies all
assets that are being leased or licensed to the Company that involve
obligations of the Company in excess of $100,000 on an individual basis.
2.7 ACCOUNTS RECEIVABLE; LOANS AND ADVANCES.
(a) All accounts receivable of the Company that are reflected in the
Unaudited Interim Balance Sheet or in the accounting records of the Company
as of the Closing Date (collectively, the "Company Accounts Receivable")
represent or will represent valid obligations arising from sales actually
made or services actually performed in the ordinary course of business.
Unless paid prior to the Closing Date, the Company Accounts Receivable are
or will be, as of the Closing Date, current and collectible net of any
respective reserves shown in the Unaudited Interim Balance Sheet (which
reserves are adequate and calculated consistent with past practice). There
is no contest, claim, or right of set-off, other than returns
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in the ordinary course of business, under any Contract with any obligor of
any Company Accounts Receivable relating to the amount or validity of such
Company Accounts Receivable.
(b) Part 2.7(b) of the Company Disclosure Schedule contains an
accurate and complete list as of the date of this Agreement of all loans
and advances made by the Company to all employees, directors, consultants
or independent contractors of the Company, other than routine travel
advances made to employees in the ordinary course of business.
2.8 EQUIPMENT; LEASEHOLD.
(a) The assets of the Company are adequate for the uses to which they
are being put, are in good condition and repair (ordinary wear and tear
excepted) and are adequate for the conduct of the Company's business in the
manner in which such business is now being conducted.
(b) The Company does not own any real property or any interest in real
property.
2.9 PROPRIETARY ASSETS.
(a) The Company has good and valid title to all Company Proprietary
Assets free and clear of all liens and other Encumbrances, and has a valid
right to use all Proprietary Assets. The Company is not obligated to make
any payment to any Person for the use of any Company Proprietary Asset. To
the best knowledge of the Company, the Company is free to use, modify,
copy, distribute, sell, license or otherwise exploit each of the Company
Proprietary Assets on an exclusive basis.
(b) The Company has taken reasonable measures and precautions
necessary to protect and maintain the confidentiality and secrecy of all
Company Proprietary Assets (except Company Proprietary Assets whose value
would be unimpaired by public disclosure) and otherwise to maintain and
protect the value of all Company Proprietary Assets. The Company has not
disclosed or delivered or permitted to be disclosed or delivered to any
Person, and no Person (other than the Company) has access to or has any
rights with respect to, any Company Proprietary Asset.
(c) To the best knowledge of the Company, none of the Company
Proprietary Assets infringes or conflicts with any Proprietary Asset owned
or used by any other Person. The Company is not misappropriating or making
any unlawful use of, and the Company has not at any time misappropriated or
made any unlawful use of, or received any notice or other communication of
any actual, alleged, possible or potential infringement, misappropriation
or unlawful use of, any Proprietary Asset owned or used by any other
Person. To the best knowledge of the Company, no other Person is
infringing, misappropriating or making any unlawful use of, and no
Proprietary Asset owned or used by any other Person infringes or conflicts
with, any Company Proprietary Asset.
(d) The Company Proprietary Assets constitute all the Proprietary
Assets necessary to enable the Company to conduct its business in the
manner in which such business has been conducted and in the manner in which
such business is proposed to be conducted after the Closing. The Company
has not licensed any of the Company Proprietary Assets to any Person on an
exclusive basis and the Company has not entered into any covenant not to
compete or Contract limiting its ability to exploit fully any of its
Proprietary Assets or to transact business in any market or geographical
area or with any Person.
2.10 CONTRACTS.
(a) Part 2.10(a) of the Company Disclosure Schedule identifies each
Company Contract that constitutes a "Material Company Contract." For
purposes of this Agreement, a "Material Company Contract" shall be deemed
to be any Contract:
(i) relating to the employment or engagement of, or the performance
of services by, any employee, consultant or independent contractor which
involves a potential commitment of the Company in excess of $60,000 per
year;
(ii) relating to the acquisition, transfer, use, development,
sharing or license of any technology or any Company Proprietary Asset
(except for any Company Proprietary Asset that is licensed to the
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Company under any third party software license agreement generally
available to the public at a cost of less than $10,000);
(iii) imposing any restriction on the Company's right or ability
(A) to compete with any other Person, (B) to acquire any product or
other asset or any services from any other Person, to sell any product
or other asset to or perform any services for any other Person or to
transact business or deal in any other manner with any other Person, or
(C) to develop or distribute any technology;
(iv) creating or involving any agency relationship, distribution
arrangement or franchise relationship involving payments or obligations
in excess of $100,000 per year;
(v) relating to the acquisition, issuance or transfer of any
securities;
(vi) creating or relating to the creation of any Encumbrance with
respect to any asset owned or used by the Company having a value in
excess of $100,000;
(vii) involving or incorporating any guaranty, any pledge, any
performance or completion bond, any indemnity (other than customary
intellectual property indemnitees for hardware and software sold by the
Company), any right of contribution or any surety arrangement, any of
which obligations involve a Company obligation in excess of $100,000 per
year;
(viii) creating or relating to any partnership or joint venture or
any sharing of revenues, profits, losses, costs or liabilities;
(ix) relating to the purchase or sale of any product or other asset
by or to, or the performance of any services by or for, any Company
Related Party (as defined in Section 2.18);
(x) entered into outside the ordinary course of business;
(xi) that may not be terminated by the Company (without penalty)
within 60 days after the delivery of a termination notice by the
Company; and
(xii) contemplating or involving (A) the payment or delivery of
cash or other consideration in an amount or having a value in excess of
$100,000 in the aggregate, or (B) the performance of services having a
value in excess of $100,000 in the aggregate.)
(b) The Company has delivered to Parent accurate and complete copies
of all Material Company Contracts identified in Part 2.10(a) of the Company
Disclosure Schedule, including all amendments thereto. Each Contract
identified in Part 2.10(a) of the Company Disclosure Schedule is valid and
in full force and effect, and is enforceable by the Company in accordance
with its terms, subject to (i) laws of general application relating to
bankruptcy, insolvency and the relief of debtors, and (ii) rules of law
governing specific performance, injunctive relief and other equitable
remedies.
(c) The Company:
(i) has not violated or breached, or committed any material default
under, any Material Company Contract in any material respect;
(ii) represents that, to the best of its knowledge, no event has
occurred, and no circumstance or condition exists, that (with or without
notice or lapse of time) will, or could reasonably be expected to, (A)
result in a violation or breach of any of the provisions of any Material
Company Contract, (B) give any Person the right to declare a default or
exercise any remedy under any Material Company Contract, (C) give any
Person the right to accelerate the maturity or performance of any
Material Company Contract, or (D) give any Person the right to cancel,
terminate or modify any Material Company Contract;
(iii) has not, since October 31, 1996, received any notice or other
communication regarding (i) any actual or possible violation or breach
of, or default under, any Material Company Contract, or (ii) any actual
or possible termination of any Material Company Contract; and
(iv) has not waived any of its material rights under any Material
Company Contract.
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2.11 NO UNDISCLOSED LIABILITIES. Except as set forth in the Company
Financial Statements and except for current liabilities incurred in the ordinary
course of business since the date of the Company Financial Statements, the
Company has no accrued, contingent or other liabilities of any nature, either
matured or unmatured.
2.12 COMPLIANCE WITH LEGAL REQUIREMENTS. The Company is, and has at all
times since December 31, 1995 been, in compliance with all applicable Legal
Requirements, except where the failure to comply with such Legal Requirements
has not had and will not have a Material Adverse Effect on the Company. Since
December 31, 1995, the Company has not received any notice or other
communication from any Governmental Body regarding any actual or possible
violation of, or failure to comply with, any Legal Requirement.
2.13 GOVERNMENTAL AUTHORIZATIONS. The Company has all Governmental
Authorizations necessary to enable the Company to conduct its business in the
manner in which its business is currently being conducted. The Company is, and
at all times since December 31, 1995 has been, in compliance with the material
terms and requirements of such Governmental Authorizations. Since December 31,
1995, the Company has not received any notice or other communication from any
Governmental Body regarding (a) any actual or possible violation of or failure
to comply with any term or requirement of any Governmental Authorization, or (b)
any actual or possible revocation, withdrawal, suspension, cancellation,
termination or modification of any Governmental Authorization.
2.14 TAX MATTERS.
(a) All Tax Returns required to be filed by or on behalf of the
Company with any Governmental Body on or before the Closing Date (the
"Company Returns") (i) have been or will be filed when due, and (ii) have
been, or will be when filed, accurately prepared in all material respects.
The Company has, within the time (including any extensions of applicable
due dates) and in the manner prescribed by law, paid all Taxes that are due
and payable, except Taxes that, individually and in the aggregate, are not
material. The Company Financial Statements fully accrue all actual and
contingent liabilities for Taxes with respect to all periods through the
dates thereof in accordance with generally accepted accounting principles.
(b) No claim or Legal Proceeding is pending or has been threatened
against or with respect to the Company in respect of any Tax. There are no
unsatisfied liabilities for Taxes (including liabilities for interest,
additions to tax and penalties thereon and related expenses) with respect
to any notice of deficiency or similar document received by the Company.
There are no liens for Taxes upon any of the assets of the Company, except
liens for current Taxes not yet due and payable.
(c) At all times since the date of its incorporation, the Company has
been an S corporation within the meaning of Section 1631(a)(1) of the Code
and has used the calendar year as its taxable year. The Company does not
conduct any business in any state or political subdivision in which the
disposition of any of its assets including goodwill in a transaction in
which gain or income would be realized would result in the imposition by
that state or political subdivision of a corporate level tax, except that
the Company is subject to taxation under the California state franchise tax
laws. The Company does not conduct any business which is a historic
business of, a continuation of, or successor to any business which was
previously conducted by another corporation or any other entity which was
subject to a United States corporate level tax on its gain or income
including a tax imposed by reason of the provisions of Section 1374 and
1375 of the Code, or any predecessor provisions thereto. The Company has
never acquired any asset, including goodwill, the basis of which was
determined in whole or in part by reference to the basis of the asset in
the hands of a C corporation within the meaning of Section 1361(a)(2) of
the Code or S corporation subject to the provisions of Section 1374 of the
Code or predecessor provisions thereto. The Company has never had any
Subchapter C earnings and profits within the meaning of Section
1362(d)(3)(B) of the Code. The Company and its shareholders have not taken
any action which will result in (i) the termination or revocation prior to
the consummation of the Merger of the Company's status as an S corporation
within the meaning of Section 1361(a)(1) of the Code or (ii) the imposition
of a tax on the Company under the provisions of Section 1374 of the Code.
The Company is not a party to
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any agreement or arrangement with its shareholders to make distributions to
its shareholders to pay any tax imposed on the shareholders, except as
provided in Section 5.8.
2.15 EMPLOYEE AND LABOR MATTERS; BENEFIT PLANS.
(a) Part 2.15(a) of the Company Disclosure Schedule contains a list of
all salaried employees of the Company as of the date of this Agreement
whose annual salaries are greater than $60,000, and correctly reflects
their salaries, any other compensation payable to them (including
compensation payable pursuant to bonus, deferred compensation or commission
arrangements), their dates of employment and their positions. The Company
is not a party to any collective bargaining contract or other Contract with
a labor union involving any of its employees.
(b) Part 2.15(b) of the Company Disclosure Schedule identifies each
salary, bonus, deferred compensation, incentive compensation, stock
purchase, stock option, severance pay, termination pay, hospitalization,
medical, insurance, supplemental unemployment benefits, profit-sharing,
pension or retirement plan, program or agreement (individually referred to
as a "Company Plan" and collectively referred to as the "Company Plans")
sponsored, maintained, contributed to or required to be contributed to by
the Company for the benefit of any current or former employee of the
Company.
(c) The Company does not maintain, sponsor or contribute to, and, to
the best of the knowledge of the Company, the Company has not at any time
in the past maintained, sponsored or contributed to, any employee pension
benefit plan (as defined in Section 3(2) of ERISA, whether or not excluded
from coverage under specific Titles or Merger Subtitles of ERISA) for the
benefit of employees or former employees of the Company (a "Company Pension
Plan").
(d) The Company does not maintain, sponsor or contribute to any
employee welfare benefit plan (as defined in Section 3(1) of ERISA, whether
or not excluded from coverage under specific Titles or Merger Subtitles of
ERISA) for the benefit of employees or former employees of the Company (a
"Company Welfare Plan") except for those Company Welfare Plans described in
Part 2.15(d) of the Company Disclosure Schedule, none of which is a
multiemployer plan (within the meaning of Section 3(37) of ERISA).
(e) With respect to each Company Plan, the Company has delivered to
Parent:
(i) an accurate and complete copy of such Company Plan (including
all amendments thereto);
(ii) an accurate and complete copy of the annual report (if
required under ERISA) with respect to such Company Plan for each of 1994
and 1995;
(iii) an accurate and complete copy of (A) the most recent summary
plan description, together with each Summary of Material Modifications
(if required under ERISA) with respect to such Company Plan, and (B)
each material employee communication relating to such Company Plan;
(iv) if such Company Plan is funded through a trust or any third
party funding vehicle, an accurate and complete copy of the trust or
other funding agreement (including all amendments thereto) and accurate
and complete copies the most recent financial statements thereof;
(v) accurate and complete copies of all Contracts relating to such
Company Plan, including service provider agreements, insurance
contracts, minimum premium contracts, stop-loss agreements, investment
management agreements, subscription and participation agreements and
recordkeeping agreements; and
(vi) an accurate and complete copy of the most recent determination
letter received from the Internal Revenue Service with respect to such
Plan (if such Plan is intended to be qualified under Section 401(a) of
the Code).
(f) The Company is not required to be, and, to the best of the
knowledge of the Company, the Company has never been required to be,
treated as a single employer with any other Person under Section
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4001(b)(1) of ERISA or Section 414(b), (c), (m) or (o) of the Code. The
Company has never been a member of an "affiliated service group" within the
meaning of Section 414(m) of the Code. To the best of the knowledge of the
Company, the Company has never made a complete or partial withdrawal from a
"multiemployer plan" (as defined in Section 3(37) of ERISA) resulting in
"withdrawal liability" (as defined in Section 4201 of ERISA), without
regard to subsequent reduction or waiver of such liability under either
Section 4207 or 4208 of ERISA.
(g) The Company does not have any plan or commitment to create any
additional Company Welfare Plan or any Company Pension Plan, or to modify
or change any existing Company Welfare Plan or Company Pension Plan (other
than to comply with applicable law).
(h) No Company Welfare Plan provides death, medical or health benefits
(whether or not insured) with respect to any current or former employee of
the Company after any such employee's termination of service (other than
(i) benefit coverage mandated by applicable law, including coverage
provided pursuant to Section 4980B of the Code, (ii) deferred compensation
benefits accrued as liabilities on the Unaudited Interim Balance Sheet, and
(iii) benefits the full cost of which are borne by current or former
employees of the Company (or their beneficiaries)).
(i) With respect to each of the Company Welfare Plans constituting a
group health plan within the meaning of Section 4980B(g)(2) of the Code,
the provisions of Section 4980B of the Code ("COBRA") have been complied
with in all material respects.
(j) Each of the Company Plans has been operated and administered in
all material respects in accordance with applicable Legal Requirements,
including ERISA and the Code.
(k) Each of the Company Plans intended to be qualified under Section
401(a) of the Code has received a favorable determination from the Internal
Revenue Service, and the Company is not aware of any reason why any such
determination letter should be revoked.
(l) Neither the execution, delivery or performance of this Agreement,
nor the consummation of the Merger or any of the other transactions
contemplated by this Agreement, will result in any bonus payment, golden
parachute payment, severance payment or other payment to any current or
former employee or director of the Company (whether or not under any
Company Plan), or materially increase the benefits payable under any
Company Plan, or result in any acceleration of the time of payment or
vesting of any such benefits.
(m) The Company is in compliance in all material respects with all
applicable Legal Requirements and Contracts relating to employment,
employment practices, employee compensation, wages, bonuses and terms and
conditions of employment.
2.16 ENVIRONMENTAL MATTERS. The Company is and has at all times been in
compliance, in all material respects, with all applicable Environmental Laws.
The Company possesses all permits and other Governmental Authorizations required
under applicable Environmental Laws, and the Company is and has at all times
been in compliance with the terms and requirements of all such Governmental
Authorizations. The Company has not received any notice or other communication
(whether from a Governmental Body, citizens group, employee or otherwise) that
alleges that the Company is not in compliance with any Environmental Law, and,
to the best knowledge of the Company, there are no circumstances that could
reasonably be expected to prevent or interfere with the Company's compliance
with any Environmental Law in the future. To the best knowledge of the Company,
no current or prior owner of any property leased or controlled by the Company
has received any notice or other communication (whether from a Governmental
Body, citizens group, employee or otherwise) that alleges that such current or
prior owner or the Company is not or was not in compliance with any
Environmental Law. (For purposes of this Section 2.16 and Section 3.16: (i)
"Environmental Law" means any federal, state, local or foreign Legal Requirement
relating to pollution or protection of human health or the environment
(including ambient air, surface water, ground water, land surface or subsurface
strata), including any law or regulation relating to emissions, discharges,
releases or threatened releases of Materials of Environmental Concern, or
otherwise relating to the manufacture, processing, distribution, use, treatment,
storage, disposal, transport or handling of Materials of Environmental Concern;
and (ii) "Materials
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of Environmental Concern" include chemicals, pollutants, contaminants, wastes,
toxic substances, petroleum and petroleum products and any other substance that
is now or in the future regulated by any Environmental Law or that is otherwise
a danger to health, reproduction or the environment.)
2.17 INSURANCE. The business and properties of the Company are insured
for the benefit of the Company in amounts deemed adequate by the Company's
management against risks usually insured against by persons operating businesses
similar to those of the Company in the localities where such properties are
located.
2.18 RELATED PARTY TRANSACTIONS. Except as set forth in the Company
Financial Statements: (a) no Company Related Party has, and no Company Related
Party has at any time since December 31, 1995 had, any direct or indirect
interest in any material asset used in or otherwise relating to the business of
the Company; (b) no Company Related Party is, or has at any time since December
31, 1995 been, indebted to the Company; (c) since December 31, 1995, no Company
Related Party has entered into, or has had any direct or indirect financial
interest in, any Material Company Contract, transaction or business dealing
involving the Company; (d) no Company Related Party is competing, or has at any
time since December 31, 1995 competed, directly or indirectly, with the Company;
and (e) no Company Related Party has any claim or right against the Company
(other than rights to receive compensation for services performed as an employee
of the Company). (For purposes of this Section 2.18, each of the following shall
be deemed to be a "Company Related Party": (i) each individual who is, or who
has at any time since December 31, 1995 been, an officer or director of the
Company; (ii) each individual who is, or who at any time since December 31, 1995
has been, a member of the immediate family of any of the individuals referred to
in clause "(i)" above; and (iii) any trust or other Entity (other than the
Company) in which any one of the individuals referred to in clauses "(i)" and
"(ii)" above holds (or in which more than one of such individuals collectively
hold), beneficially or otherwise, a material voting, proprietary or equity
interest.)
2.19 LEGAL PROCEEDINGS; ORDERS. There is no pending Legal Proceeding,
and, to the best knowledge of the Company, no Person has threatened to commence
any Legal Proceeding that: (i) may have a Material Adverse Effect on the Company
or its business; or (ii) challenges, or that may have the effect of preventing,
delaying, making illegal or otherwise interfering with, the Merger or any of the
other transactions contemplated by this Agreement. To the best knowledge of the
Company, no event has occurred, and no claim, dispute or other condition or
circumstance exists, that will, or that could reasonably be expected to, give
rise to or serve as a basis for the commencement of any such Legal Proceeding.
There is no order, writ, injunction, judgment or decree to which the Company, or
any of the assets owned or used by the Company, is subject. To the best
knowledge of the Company, no officer or other employee of the Company is subject
to any order, writ, injunction, judgment or decree that prohibits such officer
or other employee from engaging in or continuing any conduct, activity or
practice relating to the Company's business. There is no action, suit,
proceeding or investigation by the Company currently pending or which the
Company intends to initiate.
2.20 AUTHORITY; BINDING NATURE OF AGREEMENT. The Company has full
corporate power and authority to enter into and to perform its obligations under
this Agreement and the execution, delivery and performance by the Company of
this Agreement and the other agreements and transactions contemplated hereby
have been duly authorized by all necessary action on the part of the Company,
its Board of Directors and its shareholders. This Agreement constitutes the
legal, valid and binding obligation of the Company, enforceable against the
Company in accordance with its terms, except as enforcement thereof may be
limited by (i) laws of general application relating to bankruptcy, insolvency,
moratorium, reorganization or other similar laws, both state and federal,
affecting the enforcement of creditors' rights or remedies in general, and (ii)
rules of law governing specific performance, injunctive relief and other
equitable remedies.
2.21 NON-CONTRAVENTION; CONSENTS AND NOTICES. Neither (1) the execution,
delivery or performance of this Agreement or any of the other agreements
referred to in this Agreement, nor (2) the consummation of the Merger or any of
the other transactions contemplated by this Agreement, will directly or
indirectly (with or without notice or lapse of time):
(a) contravene, conflict with or result in a violation of any of the
provisions of the Company's articles of incorporation or bylaws;
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(b) with respect to the Company, contravene, conflict with or result
in a violation of, or give any Governmental Body or other Person the right
to challenge any of the transactions contemplated by this Agreement or to
exercise any remedy or obtain any relief under, any Legal Requirement or
any order, writ, injunction, judgment or decree to which the Company, or
any of the assets owned or used by the Company, is subject;
(c) with respect to the Company, contravene, conflict with or result
in a violation of any of the terms or requirements of, or give any
Governmental Body the right to revoke, withdraw, suspend, cancel, terminate
or modify, any Governmental Authorization that is held by the Company or
that otherwise relates to the Company's business or to any of the assets
owned or used by the Company;
(d) contravene, conflict with or result in a violation or breach of,
or result in a default under, any provision of any Material Company
Contract, or give any Person the right to (i) declare a default or exercise
any remedy under any Material Company Contract, (ii) accelerate the
maturity or performance of any Material Company Contract, or (iii) cancel,
terminate or modify any Material Company Contract; or
(e) result in the imposition or creation of any lien or other
Encumbrance upon or with respect to any asset owned or used by the Company
(except for minor liens that will not, in any case or in the aggregate,
materially detract from the value of the assets subject thereto or
materially impair the operations of the Company).
Except as may be required by the HSR Act, the DGCL, the CGCL and state
securities or blue sky laws, the Company is not and will not be required to make
any filing with or give any notice to, or to obtain any Consent from, any Person
in connection with (x) the execution, delivery or performance of this Agreement
or any of the other agreements referred to in this Agreement, or (y) the
consummation of the Merger or any of the other transactions contemplated by this
Agreement.
2.22 FULL DISCLOSURE.
(a) This Agreement (including the Company Disclosure Schedule) does
not, (i) contain any representation, warranty or information that is false
or misleading with respect to any material fact, or (ii) omit to state any
material fact necessary in order to make the representations, warranties
and information contained and to be contained herein and therein not false
or misleading.
(b) The information supplied by the Company for inclusion in the Proxy
Statement (as defined in Section 5.5(a)) will not, as of the date of the
Proxy Statement or as of the date of the Parent Shareholders' Meeting (as
defined in Section 5.6), contain any statement that is inaccurate or
misleading with respect to any material fact, or (ii) omit to state any
material fact necessary in order to make such information not false or
misleading.
2.23 FINDER'S FEE. No broker, finder or investment banker is entitled to
any brokerage, finder's or other fee or commission in connection with the Merger
or any of the other transactions contemplated thereby based upon arrangements
made by or on behalf of the Company.
SECTION 3. REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB
Parent and Merger Sub represent and warrant to the Company that, except as
set forth in the Parent SEC Documents (as defined in Section 3.3(a)) or in the
disclosure schedule prepared by Parent in accordance with the requirements of
Section 12.11 and that has been delivered by Parent to the Company on the date
of this Agreement (the "Parent Disclosure Schedule") (the Parent SEC Documents
and the Parent Disclosure Schedule are collectively referred to herein as the
"Parent Disclosure Documents"):
3.1 DUE ORGANIZATION, ETC.
(a) Each of Parent, Merger Sub and each other subsidiary of Parent are
corporations duly organized, validly existing and in good standing under
the laws of their respective jurisdictions of incorporation, and each of
them have full corporate power and authority: (i) to conduct its business
in the
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manner in which its business is currently being conducted; (ii) to own and
use its assets in the manner in which its assets are currently owned and
used; and (iii) to perform its obligations under all Material Parent
Contracts by which it is bound. Each of Parent, Merger Sub and each other
subsidiary of Parent is duly qualified to do business and is in good
standing in each jurisdiction in which the failure to be so qualified would
have a Material Adverse Effect on Parent and its subsidiaries taken as a
whole or on the ability of Parent or Merger Sub to consummate the
transactions contemplated hereby. Parent has no subsidiaries other than the
Subsidiaries disclosed on Exhibit 21 to its Annual Report on Form 10-K for
the year ended December 31, 1995 (the "Parent Subsidiaries"). Other than in
connection with any change in the conduct of Parent's business proposed to
be made by the Company or in connection with the Merger, Parent does not
have any plans to change, in any material respect, a line of its business.
3.2 CAPITALIZATION, ETC. The authorized capital stock of Parent consists
of: (i) 20,000,000 shares of Class A Common Stock, $.01 par value per share,
5,633,819 shares of which have been issued and are outstanding as of the date
hereof; and (ii) 2,250,000 shares of Class C Common Stock, $0.01 par value per
share, none of which are issued or outstanding. All of the outstanding shares of
Parent, Merger Sub and each Parent Subsidiary capital stock have been duly
authorized and validly issued, and are fully paid and nonassessable, and none of
such shares is subject to any repurchase option or restriction on transfer other
than restrictions imposed by federal or state securities laws. All outstanding
shares of Parent, Merger Sub and Parent Subsidiaries capital stock have been
issued in compliance with all applicable securities laws and other applicable
Legal Requirements, and all requirements set forth in applicable Parent
Contracts. All of the outstanding shares of capital stock of Merger Sub and each
Parent Subsidiary are owned beneficially and of record by Parent, free and clear
of any Encumbrances. There are no outstanding subscriptions, options, calls,
warrants or other rights (whether or not currently exercisable) to acquire any
shares of the capital stock or other securities of Parent. The Merger Shares,
when issued by Parent to the Company's shareholders in accordance with the terms
of this Agreement, will be duly authorized, validly issued, fully paid and
nonassessable, will be issued in compliance with applicable federal and state
securities laws and will be free and clear of any Encumbrances created or
imposed, directly or indirectly, by Parent. There are no preemptive or similar
rights with respect to the Parent's capital stock.
3.3 SEC FILINGS; FINANCIAL STATEMENTS
(a) Parent has delivered to the Company accurate and complete copies
(including copies of all exhibits) of each report, schedule, registration
statement and definitive proxy statement filed by Parent with the SEC since
January 1, 1994 (the "Parent SEC Documents"), which are all the reports and
documents required to be filed by Parent with the SEC since January 1,
1994. Each of the Parent SEC Documents was timely filed by Parent in
accordance with the rules and regulations of the SEC and the NASD. As of
the time it was filed with the SEC (or, if amended or superseded by a
filing prior to the date of this Agreement, then on the date of such
filing): (i) each of the Parent SEC Documents complied in all material
respects with the applicable requirements of the Securities Act or the
Exchange Act (as the case may be); and (ii) none of the Parent SEC
Documents contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary in order
to make the statements therein, in the light of the circumstances under
which they were made, not misleading.
(b) Parent is eligible to file a registration statement on Form S-3
with the SEC covering the registration of the Merger Shares for resale and
meets all of the requirements for the use of Form S-3 for resales,
including all requirements set forth in Form S-3 and the rules and
regulations promulgated under the Securities Act.
(c) As of the time they were filed with the SEC, the consolidated
financial statements (including, in each case, any notes related thereto)
contained in the Parent SEC Documents: (i) complied as to form in all
material respects with the published rules and regulations of the SEC
applicable thereto; (ii) were prepared in accordance with generally
accepted accounting principles applied on a consistent basis throughout the
periods covered (except as may be indicated in the notes to such financial
statements and, in the case of unaudited statements, as permitted by Form
10-Q of the SEC, and except that unaudited
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financial statements may not contain footnotes and are subject to year-end
audit adjustments); and (iii) fairly present the consolidated financial
position of Parent and its subsidiaries as of the respective dates thereof
and the consolidated results of operations of Parent and its subsidiaries
for the periods covered thereby. There are no amendments to the Parent
consolidated financial statements dated September 30, 1996 (as filed with
the SEC) necessary in order to make such statements comply with clauses
(i), (ii) and (iii) above.
(d) Parent has furnished to the Company a complete and accurate copy
of any amendments, supplements or modifications that have not yet been
filed with the SEC to agreements, documents or other instruments that have
been previously filed by Parent with the SEC pursuant to the Securities Act
or the Exchange Act.
3.4 DISCLOSURE. None of the information relating to Parent or Parent
Subsidiaries or Parent's officers and directors to be contained in the Proxy
Statement will, at the time the Proxy Statement is mailed to the shareholders of
Parent or at the time of the Parent Shareholders' Meeting, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in the
light of the circumstances under which they are made, not misleading.
3.5 ABSENCE OF CHANGES. Since December 31, 1996:
(a) there has not been any material adverse change in the business,
condition, assets, liabilities, operations or financial performance of
Parent or any of the Parent Subsidiaries, and, to the best knowledge of
Parent, no event has occurred that will, or could reasonably be expected
to, have a Material Adverse Effect on Parent and its subsidiaries taken as
a whole;
(b) there has not been any material loss, damage or destruction to any
of the assets of Parent or any of the Parent Subsidiaries (whether or not
covered by insurance);
(c) neither Parent nor any Parent Subsidiary has declared, accrued,
set aside or paid any dividend or made any other distribution in respect of
any shares of capital stock nor has repurchased, redeemed or otherwise
reacquired any shares of capital stock or other securities;
(d) neither Parent nor any Parent Subsidiary has sold, issued or
authorized the issuance of (i) any capital stock or other security (except
for Parent Common Stock issued upon the exercise of outstanding Parent
Options or Parent Warrants described in the Parent Disclosure Documents),
(ii) any option, call, warrant or right to acquire, or otherwise relating
to, any capital stock or any other security (except for Parent Options and
Parent Warrants described in the Parent Disclosure Documents), or (iii) any
instrument convertible into or exchangeable for any capital stock or other
security;
(e) there has been no amendment to the articles of organization or
bylaws of Parent or any Parent Subsidiary, and neither Parent nor any
Parent Subsidiary has effected or been a party to any Parent Acquisition
Transaction, recapitalization, reclassification of shares, stock split,
reverse stock split or similar transaction;
(f) neither Parent nor any Parent Subsidiary has amended or waived any
of its rights under, or permitted the acceleration of vesting under (i) any
provision of any agreement evidencing any outstanding Parent Option or
Parent Warrant, or (ii) any restricted stock purchase agreement;
(g) neither Parent nor any Parent Subsidiary has formed any subsidiary
or acquired any equity interest or other interest in any other Entity other
than Merger Sub;
(h) neither Parent nor any Parent Subsidiary has made any capital
expenditure which, when added to all other capital expenditures made
exceeds $100,000 in the aggregate;
(i) neither Parent nor any Parent Subsidiary has (i) entered into any
Material Parent Contract (as defined in Section 3.10(a)), or (ii) amended
or prematurely terminated, or waived any material right or remedy under,
any Material Parent Contract to which it is or was a party or under which
it has or had any material rights or obligations;
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(j) neither Parent nor any Parent Subsidiary has (i) acquired, leased
or licensed any right or other asset from any other Person, (ii) sold or
otherwise disposed of, or leased or licensed, any right or other asset to
any other Person, or (iii) waived or relinquished any right, except for
immaterial rights or other immaterial assets acquired, leased, licensed or
disposed of in the ordinary course of business and consistent with past
practices;
(k) neither Parent nor any Parent Subsidiary has written off as
uncollectible, or established any reserve with respect to, any account
receivable or other indebtedness in excess of $100,000 individually or in
the aggregate;
(l) neither Parent nor any Parent Subsidiary has made any pledge of
any of its assets or otherwise permitted any of its assets to become
subject to any Encumbrance, except for pledges of assets valued at $100,000
or less, individually or in the aggregate, made in the ordinary course of
business and consistent with past practices;
(m) neither Parent nor any Parent Subsidiary has (i) lent money to any
Person, or (ii) incurred or guaranteed any indebtedness for borrowed money
in excess of $100,000 individually or in the aggregate;
(n) neither Parent nor any Parent Subsidiary has (i) established,
adopted or amended any Employee Benefit Plan, (ii) paid any bonus or made
any profit-sharing or similar payment to, or increased the amount of the
wages, salary, commissions, fringe benefits or other compensation or
remuneration payable to, any of its directors, officers or employees, or
(iii) hired any new employee except in the ordinary course of business and
consistent with past practices;
(o) neither Parent nor any Parent Subsidiary has changed any of its
methods of accounting or accounting practices in any respect;
(p) neither Parent nor any Parent Subsidiary has made any Tax
election;
(q) neither Parent nor any Parent Subsidiary has commenced or settled
any Legal Proceeding;
(r) neither Parent nor any Parent Subsidiary has entered into any
material transaction or taken any other material action outside the
ordinary course of business or inconsistent with its past practices; and
(s) neither Parent nor any Parent Subsidiary has agreed or committed
to take any of the actions referred to in clauses "(c)" through "(r)"
above.
3.6 TITLE TO ASSETS.
(a) Parent and each Parent Subsidiary owns, and has good and valid
title to, all assets purported to be owned by it, including the assets
reflected in the Parent consolidated financial statements dated as of
December 31, 1996 (as of the respective dates of such statements) and all
other assets reflected in such entity's books and records as being owned by
it. All of said assets are owned by Parent or such Parent Subsidiary, as
the case may be, free and clear of any Encumbrances, except for (i) any
lien for current taxes not yet due and payable and (ii) minor liens that
have arisen in the ordinary course of business and that do not (in any case
or in the aggregate) materially detract from the value of the assets
subject thereto or materially impair the operations of Parent and its
subsidiaries taken as a whole.
(b) Part 3.6(b) of the Parent Disclosure Schedule identifies all
assets that are being leased or licensed to Parent and each Parent
Subsidiary that involve obligations in excess of $100,000 on an individual
basis, and that are not otherwise disclosed in the Parent SEC Documents.
3.7 BANK ACCOUNTS; ACCOUNTS RECEIVABLE; LOANS AND ADVANCES.
(a) Part 3.7(a) of the Parent Disclosure Schedule provides a list of
each account maintained by or for the benefit of Parent and each Parent
Subsidiary at any bank or other financial institution.
(b) All accounts receivable of Parent and each Parent Subsidiary that
are reflected in the Parent consolidated financial statements dated as of
December 31, 1996 (collectively, the "Parent Accounts Receivable")
represent or will represent valid obligations arising from sales actually
made or services
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actually performed in the ordinary course of business. Unless paid prior to
the Closing Date, the Parent Accounts Receivable are or will be, as of the
Closing Date, current and collectible net of any respective reserves shown
in the Parent consolidated financial statements dated as of December 31,
1996 (which reserves are adequate and calculated consistent with past
practice). There is no contest, claim, or right of set-off, other than
returns in the ordinary course of business, under any Contract with any
obligor of any Parent Accounts Receivable relating to the amount or
validity of such Parent Accounts Receivable.
(c) Part 3.7(c) of Parent Disclosure Schedule contains an accurate and
complete list as of the date of this Agreement of all loans and advances
made by Parent or any Parent Subsidiary to any employee, director,
consultant or independent contractor of Parent or any Parent Subsidiary,
other than routine travel advances made to employees in the ordinary course
of business.
3.8 EQUIPMENT; LEASEHOLD.
(a) The assets of Parent and each Parent Subsidiary are adequate for
the uses to which they are being put, are in good condition and repair
(ordinary wear and tear excepted) and are adequate for the conduct of such
entity's business in the manner in which such business is now being
conducted.
(b) Neither Parent nor any Parent Subsidiary owns any real property or
any interest in real property, except as described in the Parent SEC
Documents.
3.9 PROPRIETARY ASSETS.
(a) Parent has good and valid title to all Parent Proprietary Assets
free and clear of all Encumbrances, and has a valid right to use all Parent
Proprietary Assets. No Parent Subsidiary has any title to any Parent
Proprietary Asset. Neither Parent nor any Parent Subsidiary is obligated to
make any payment to any Person for the use of any Parent Proprietary Asset.
To the best knowledge of Parent, Parent is free to use, modify, copy,
distribute, sell, license or otherwise exploit each of the Parent
Proprietary Assets on an exclusive basis.
(b) Parent and each Parent Subsidiary has taken reasonable measures
and precautions necessary to protect and maintain the confidentiality and
secrecy of all Parent Proprietary Assets (except Parent Proprietary Assets
whose value would be unimpaired by public disclosure) and otherwise to
maintain and protect the value of all Parent Proprietary Assets. Neither
Parent nor any Parent Subsidiary has disclosed or delivered or permitted to
be disclosed or delivered to any Person, and no Person (other than Parent
or a Parent Subsidiary) has access to or has any rights with respect to any
Parent Proprietary Asset.
(c) To the best knowledge of Parent, none of the Parent Proprietary
Assets infringes or conflicts with any Proprietary Asset owned or used by
any other Person. Neither Parent nor any Parent Subsidiary is
misappropriating or making any unlawful use of, and neither Parent nor any
Parent Subsidiary has at any time misappropriated or made any unlawful use
of, or received any notice or other communication of any actual, alleged,
possible or potential infringement, misappropriation or unlawful use of,
any Proprietary Asset owned or used by any other Person. To the best
knowledge of Parent, no other Person is infringing, misappropriating or
making any unlawful use of, and no Proprietary Asset owned or used by any
other Person infringes or conflicts with, any Parent Proprietary Asset.
(d) Parent Proprietary Assets constitute all the Proprietary Assets
necessary to enable Parent and each Parent Subsidiary to conduct its
business in the manner in which such business has been conducted. Neither
Parent nor any Parent Subsidiary has licensed any of the Parent Proprietary
Assets to any Person on an exclusive basis and neither Parent nor any
Parent Subsidiary has entered into any covenant not to compete or Contract
limiting its ability to exploit fully any of its Proprietary Assets or to
transact business in any market or geographical area or with any Person.
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3.10 CONTRACTS.
(a) Part 3.10(a) of the Parent Disclosure Schedule identifies each
Parent Contract that constitutes a "Material Parent Contract." For purposes
of this Agreement, a "Material Parent Contract" shall be deemed to be any
Contract:
(i) relating to the employment or engagement of, or the performance
of services by, any employee, consultant or independent contractor which
involves a potential commitment of Parent in excess of $60,000 per year;
(ii) relating to the acquisition, transfer, use, development,
sharing or license of any technology or any Parent Proprietary Asset
(except for any Parent Proprietary Asset that is licensed to the Parent
or any Parent Subsidiary under any third party software license
agreement generally available to the public at a cost of less than
$10,000);
(iii) imposing any restriction on Parent's or any Parent
Subsidiary's right or ability (A) to compete with any other Person, (B)
to acquire any product or other asset or any services from any other
Person, to sell any product or other asset to or perform any services
for any other Person or to transact business or deal in any other manner
with any other Person, or (C) to develop or distribute any technology;
(iv) creating or involving any agency relationship, distribution
arrangement or franchise relationship involving payments or obligations
in excess of $100,000 per year;
(v) relating to the acquisition, issuance or transfer of any
securities other than stock options granted to employees, directors or
consultants pursuant to a Parent Plan;
(vi) creating or relating to the creation of any Encumbrance with
respect to any asset owned or used by Parent or any Parent Subsidiary
having a value in excess of $100,000;
(vii) involving or incorporating any guaranty, any pledge, any
performance or completion bond, any indemnity (other than customary
intellectual property indemnities for hardware and software sold by
Parent), any right of contribution or any surety arrangement, any of
which obligations involve a Parent obligation in excess of $100,000 per
year;
(viii) creating or relating to any partnership or joint venture or
any sharing of revenues, profits, losses, costs or liabilities;
(ix) relating to the purchase or sale of any product or other asset
by or to, or the performance of any services by or for, any Parent
Related Party (as defined in Section 3.18);
(x) entered into outside the ordinary course of business;
(xi) that may not be terminated by Parent or such Parent Subsidiary
(without penalty) within 60 days after the delivery of a termination
notice by Parent or such Parent Subsidiary; and
(xii) contemplating or involving (A) the payment or delivery of
cash or other consideration in an amount or having a value in excess of
$100,000 in the aggregate, or (B) the performance of services having a
value in excess of $100,000 in the aggregate.)
(b) Parent has delivered to the Company accurate and complete copies
of all Material Parent Contracts identified in Part 3.10(a) of the Parent
Disclosure Schedule, including all amendments thereto. Each Material Parent
Contract identified in Part 3.10(a) of the Parent Disclosure Schedule is
valid and in full force and effect, and is enforceable by Parent or such
Parent Subsidiary in accordance with its terms, subject to (i) laws of
general application relating to bankruptcy, insolvency and the relief of
debtors, and (ii) rules of law governing specific performance, injunctive
relief and other equitable remedies.
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(c) Parent and each Parent Subsidiary:
(i) have not violated or breached, or committed any material
default under, any Material Parent Contract in any material respect;
(ii) represent that, to the best of their knowledge, no event has
occurred, and no circumstance or condition exists, that (with or without
notice or lapse of time) will, or could reasonably be expected to, (A)
result in a violation or breach of any of the provisions of any Material
Parent Contract, (B) give any Person the right to declare a default or
exercise any remedy under any Material Parent Contract, (C) give any
Person the right to accelerate the maturity or performance of any
Material Parent Contract, or (D) give any Person the right to cancel,
terminate or modify any Material Parent Contract;
(iii) have not, since September 30, 1996, received any notice or
other communication regarding (i) any actual or possible violation or
breach of, or default under, any Material Parent Contract, or (ii) any
actual or possible termination of any Material Parent Contract; and
(iv) have not waived any of their material rights under any
Material Parent Contract.
3.11 NO UNDISCLOSED LIABILITIES. Except as set forth in the Parent SEC
Documents and except for current liabilities incurred in the ordinary course of
business since September 30, 1996, neither Parent nor any Parent Subsidiary has
accrued, contingent or other liabilities of any nature, either matured or
unmatured.
3.12 COMPLIANCE WITH LEGAL REQUIREMENTS. Parent and each Parent
Subsidiary is, and has at all times since December 31, 1995 been, in compliance
with all applicable Legal Requirements, except where the failure to comply with
such Legal Requirements has not had and will not have a Material Adverse Effect
on Parent and the Parent Subsidiaries taken as a whole. Since December 31, 1995,
neither Parent nor any Parent Subsidiary has received any notice or other
communication from any Governmental Body regarding any actual or possible
violation of, or failure to comply with, any Legal Requirement.
3.13 GOVERNMENTAL AUTHORIZATIONS. Parent and each Parent Subsidiary has
all Governmental Authorizations necessary to enable Parent and such Parent
Subsidiary to conduct its business in the manner in which its business is
currently being conducted. Parent and each Parent Subsidiary is, and at all
times since December 31, 1995 has been, in compliance with the material terms
and requirements of such Governmental Authorizations. Since December 31, 1995,
neither Parent nor any Parent Subsidiary has received any notice or other
communication from any Governmental Body regarding (a) any actual or possible
violation of or failure to comply with any term or requirement of any
Governmental Authorization, or (b) any actual or possible revocation,
withdrawal, suspension, cancellation, termination or modification of any
Governmental Authorization.
3.14 TAX MATTERS.
(a) All Tax Returns required to be filed by or on behalf of Parent
with any Governmental Body on or before the Closing Date (the "Parent
Returns") (i) have been or will be filed when due, and (ii) have been, or
will be when filed, accurately prepared in all material respects. Parent
and each Parent Subsidiary has, within the time (including any extensions
of applicable due dates) and in the manner prescribed by law, paid all
Taxes that are due and payable, except Taxes that, individually and in the
aggregate, are not material. The consolidated financial statements of
Parent contained in the Parent SEC Documents fully accrue all actual and
contingent liabilities for Taxes with respect to all periods through the
dates thereof in accordance with generally accepted accounting principles.
(b) No claim or Legal Proceeding is pending or has been threatened
against or with respect to Parent or any Parent Subsidiary in respect of
any Tax. There are no unsatisfied liabilities for Taxes (including
liabilities for interest, additions to tax and penalties thereon and
related expenses) with respect to any notice of deficiency or similar
document received by Parent or any Parent Subsidiary. There are no liens
for Taxes upon any of the assets of Parent or any Parent Subsidiary, except
liens for current Taxes not yet due and payable.
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3.15 EMPLOYEE AND LABOR MATTERS; BENEFIT PLANS.
(a) Part 3.15(a) of the Parent Disclosure Schedule contains a list of
all salaried employees of Parent and each Parent Subsidiary as of the date
of this Agreement whose annual salaries are greater than $60,000, and
correctly reflects their salaries, any other compensation payable to them
(including compensation payable pursuant to bonus, deferred compensation or
commission arrangements), their dates of employment and their positions.
Neither Parent nor any Parent Subsidiary is a party to any collective
bargaining contract or other Contract with a labor union involving any of
its employees.
(b) Part 3.15(b) of the Parent Disclosure Documents identifies each
salary, bonus, deferred compensation, incentive compensation, stock
purchase, stock option, severance pay, termination pay, hospitalization,
medical, insurance, supplemental unemployment benefits, profit-sharing,
pension or retirement plan, program or agreement (individually referred to
as a "Parent Plan" and collectively referred to as the "Parent Plans")
sponsored, maintained, contributed to or required to be contributed to by
Parent or any Parent Subsidiary for the benefit of any current or former
employee of Parent or any Parent Subsidiary.
(c) Neither Parent nor any Parent Subsidiary maintains, sponsors or
contributes to, and, to the best of the knowledge of Parent, neither Parent
nor any Parent Subsidiary has at any time in the past maintained, sponsored
or contributed to, any employee pension benefit plan (as defined in Section
3(2) of ERISA), whether or not excluded from coverage under specific Titles
or Merger Subtitles of ERISA) for the benefit of employees or former
employees of Parent (a "Parent Pension Plan").
(d) Neither Parent nor any Parent Subsidiary maintains, sponsors or
contributes to any employee welfare benefit plan (as defined in Section
3(1) of ERISA, whether or not excluded from coverage under specific Titles
or Merger Subtitles of ERISA) for the benefit of employees or former
employees of Parent or any Parent Subsidiary (a "Parent Welfare Plan")
except for those Parent Welfare Plans described in Part 3.15(d) of the
Parent Disclosure Schedule or in the Parent SEC Documents, none of which is
a multiemployer plan (within the meaning of Section 3(37) of ERISA).
(e) With respect to each Parent Plan, Parent has delivered to the
Company:
(i) an accurate and complete copy of such Parent Plan (including
all amendments thereto);
(ii) an accurate and complete copy of the annual report (if
required under ERISA) with respect to such Parent Plan for each of 1994
and 1995;
(iii) an accurate and complete copy of (A) the most recent summary
plan description, together with each Summary of Material Modifications
(if required under ERISA) with respect to such Parent Plan, and (B) each
material employee communication relating to such Parent Plan;
(iv) if such Parent Plan is funded through a trust or any third
party funding vehicle, an accurate and complete copy of the trust or
other funding agreement (including all amendments thereto) and accurate
and complete copies the most recent financial statements thereof;
(v) accurate and complete copies of all Contracts relating to such
Parent Plan, including service provider agreements, insurance contracts,
minimum premium contracts, stop-loss agreements, investment management
agreements, subscription and participation agreements and recordkeeping
agreements; and
(vi) an accurate and complete copy of the most recent determination
letter received from the Internal Revenue Service with respect to such
Plan (if such Plan is intended to be qualified under Section 401(a) of
the Code).
(f) Neither Parent nor any Parent Subsidiary is required to be, and,
to the best of the knowledge of Parent, neither Parent nor any Parent
Subsidiary has ever been required to be, treated as a single employer with
any other Person under Section 4001(b)(1) of ERISA or Section 414(b), (c),
(m) or (o) of the Code. Neither Parent nor any Parent Subsidiary has ever
been a member of an "affiliated service group" within the meaning of
Section 414(m) of the Code. To the best knowledge of Parent,
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neither Parent nor any Parent Subsidiary has ever made a complete or
partial withdrawal from a "multiemployer plan" (as defined in Section 3(37)
of ERISA) resulting in "withdrawal liability" (as defined in Section 4201
of ERISA), without regard to subsequent reduction or waiver of such
liability under either Section 4207 or 4208 of ERISA.
(g) Neither Parent nor any Parent Subsidiary has any plan or
commitment to create any additional Parent Welfare Plan or any Parent
Pension Plan, or to modify or change any existing Parent Welfare Plan or
Parent Pension Plan (other than to comply with applicable law).
(h) No Parent Welfare Plan provides death, medical or health benefits
(whether or not insured) with respect to any current or former employee of
Parent or any Parent Subsidiary after any such employee's termination of
service (other than (i) benefit coverage mandated by applicable law,
including coverage provided pursuant to Section 4980B of the Code, (ii)
deferred compensation benefits accrued as liabilities on the consolidated
financial statements included in the Parent SEC Documents, and (iii)
benefits the full cost of which are borne by current or former employees of
Parent or any Parent Subsidiary (or their beneficiaries)).
(i) With respect to each of Parent Welfare Plans constituting a group
health plan within the meaning of Section 4980B(g)(2) of the Code, the
provisions of Section 4980B of the Code ("COBRA") have been complied with
in all material respects.
(j) Each of the Parent Plans has been operated and administered in all
material respects in accordance with applicable Legal Requirements,
including ERISA and the Code.
(k) Each of the Parent Plans intended to be qualified under Section
401(a) of the Code has received a favorable determination from the Internal
Revenue Service, and Parent is not aware of any reason why any such
determination letter should be revoked.
(l) Neither the execution, delivery or performance of this Agreement,
nor the consummation of the Merger or any of the other transactions
contemplated by this Agreement, will result in any bonus payment, golden
parachute payment, severance payment or other payment to any current or
former employee or director of Parent or any Parent Subsidiary (whether or
not under any Parent Plan), or materially increase the benefits payable
under any Parent Plan, or result in any acceleration of the time of payment
or vesting of any such benefits.
(m) Parent and each Parent Subsidiary is in compliance in all material
respects with all applicable Legal Requirements and Contracts relating to
employment, employment practices, employee compensation, wages, bonuses and
terms and conditions of employment.
3.16 ENVIRONMENTAL MATTERS. Parent and each Parent Subsidiary is and has
at all times been in compliance, in all material respects, with all applicable
Environmental Laws. Parent and each Parent Subsidiary possesses all permits and
other Governmental Authorizations required under applicable Environmental Laws,
and Parent and each Parent Subsidiary is and has at all times been in compliance
with the terms and requirements of all such Governmental Authorizations. Neither
Parent nor any Parent Subsidiary has received any notice or other communication
(whether from a Governmental Body, citizens group, employee or otherwise) that
alleges that Parent or any Parent Subsidiary is not in compliance with any
Environmental Law, and, to the best knowledge of Parent, there are no
circumstances that could reasonably be expected to prevent or interfere with
Parent's or any Parent Subsidiary's compliance with any Environmental Law in the
future. To the best knowledge of Parent, no current or prior owner of any
property leased or controlled by Parent and/or such Parent Subsidiary has
received any notice or other communication (whether from a Governmental Body,
citizens group, employee or otherwise) that alleges that such current or prior
owner or Parent and/or such Parent Subsidiary is not or was not in compliance
with any Environmental Law.
3.17 INSURANCE. The business and properties of Parent and each Parent
Subsidiary are insured for the benefit of Parent and/or such Parent Subsidiary
in amounts deemed adequate by Parent's management against risks usually insured
against by persons operating businesses similar to those of Parent or such
Parent Subsidiary in the localities where such properties are located.
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3.18 RELATED PARTY TRANSACTIONS. Except as set forth in the Parent SEC
Documents: (a) no Parent Related Party has, and no Parent Related Party has at
any time since December 31, 1995 had, any direct or indirect interest in any
material asset used in or otherwise relating to the business of Parent or any
Parent Subsidiary; (b) no Parent Related Party is, or has at any time since
December 31, 1995 been, indebted to Parent or any Parent Subsidiary; (c) since
December 31, 1995, no Parent Related Party has entered into, or has had any
direct or indirect financial interest in, any Material Parent Contract,
transaction or business dealing involving Parent or any Parent Subsidiary; (d)
no Parent Related Party is competing, or has at any time since December 31, 1995
competed, directly or indirectly, with Parent or any Parent Subsidiary; and (e)
no Parent Related Party has any claim or right against Parent or any Parent
Subsidiary (other than rights to receive compensation for services performed as
an employee of Parent or any Parent Subsidiary). (For purposes of this Section
3.18, each of the following shall be deemed to be a "Parent Related Party": (i)
each individual who is, or who has at any time since December 31, 1995 been, an
officer or director of Parent or any Parent Subsidiary; (ii) each individual who
is, or who at any time since December 31, 1995 has been, a member of the
immediate family of any of the individuals referred to in clause "(i)" above;
and (iii) any trust or other Entity (other than Parent or a Parent Subsidiary)
in which any one of the individuals referred to in clauses "(i)" and "(ii)"
above holds (or in which more than one of such individuals collectively hold),
beneficially or otherwise, a material voting, proprietary or equity interest.)
3.19 LEGAL PROCEEDINGS; ORDERS. There is no pending Legal Proceeding,
and, to the best knowledge of Parent, no Person has threatened to commence any
Legal Proceeding that: (i) may have a Material Adverse Effect on Parent, any
Parent Subsidiary or their businesses taken as a whole; or (ii) challenges, or
that may have the effect of preventing, delaying, making illegal or otherwise
interfering with, the Merger or any of the other transactions contemplated by
this Agreement. To the best knowledge of Parent, no event has occurred, and no
claim, dispute or other condition or circumstance exists, that will, or that
could reasonably be expected to, give rise to or serve as a basis for the
commencement of any such Legal Proceeding. There is no order, writ, injunction,
judgment or decree to which Parent or any Parent Subsidiary, or any of the
assets owned or used by Parent or any Parent Subsidiary, is subject. To the best
knowledge of Parent, no officer or other employee of Parent or any Parent
Subsidiary is subject to any order, writ, injunction, judgment or decree that
prohibits such officer or other employee from engaging in or continuing any
conduct, activity or practice relating to Parent's or such Parent Subsidiary's
business. There is no action, suit, proceeding or investigation by Parent or any
Parent Subsidiary currently pending or which Parent or any Parent Subsidiary
intends to initiate.
3.20 AUTHORITY; BINDING NATURE OF AGREEMENT. Except for the approval of
the Merger by the shareholders of Parent as contemplated by Section 5.6, Parent
and Merger Sub have the full corporate power and authority to perform their
obligations under this Agreement; the execution, delivery and performance by
Parent and Merger Sub of this Agreement have been duly authorized by all
necessary action on the part of Parent and Merger Sub and their respective
Boards of Directors, and the execution, delivery and performance of this
Agreement by Merger Sub have been duly authorized by all necessary action on the
part of Parent, as the sole shareholder of Merger Sub. This Agreement consitutes
the legal, valid and binding obligation of Parent and Merger Sub, enforceable
against them in accordance with its terms, except as enforcement thereof may be
limited by (i) laws of general application relating to bankruptcy, insolvency
moratorium, reorganization or other similar laws, both state and federal,
affecting the enforcement of creditors' rights or remedies in general, and (ii)
rules of law governing specific performance, injunctive relief and other
equitable remedies.
3.21 NON-CONTRAVENTION; CONSENTS AND NOTICES. Neither (1) the execution,
delivery or performance of this Agreement or any of the other agreements
referred to in this Agreement, nor (2) the consummation of the Merger or any of
the other transactions contemplated by this Agreement, will directly or
indirectly (with or without notice or lapse of time):
(a) contravene, conflict with or result in a violation of any of the
provisions of Parent's or any Parent Subsidiary's articles of organization,
articles of incorporation or bylaws;
(b) with respect to Parent or any Parent Subsidiary, contravene,
conflict with or result in a violation of, or give any Governmental Body or
other Person the right to challenge any of the transactions contemplated by
this Agreement or to exercise any remedy or obtain any relief under, any
Legal
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Requirement or any order, writ, injunction, judgment or decree to which
Parent or any Parent Subsidiary, or any of the assets owned or used by
Parent or any Parent Subsidiary, is subject;
(c) with respect to Parent or any Parent Subsidiary, contravene,
conflict with or result in a violation of any of the terms or requirements
of, or give any Governmental Body the right to revoke, withdraw, any
Governmental Authorization that is held by Parent or any Parent Subsidiary
or that otherwise relates to Parent's or any Parent Subsidiary's business
or to any of the assets owned or used by Parent or any Parent Subsidiary;
(d) contravene, conflict with or result in a violation of breach of,
or result in a default under, any provision of any Material Parent
Contract, or give any Person the right to (i) declare a default or exercise
any remedy under any Material Parent Contract, (ii) accelerate the maturity
or performance of any Material Parent Contract, or (iii) cancel, terminate
or modify any Material Parent Contract; or
(e) result in the imposition or creation of any lien or other
Encumbrance upon or with respect to any asset owned or used by Parent or
any Parent Subsidiary (except for minor liens that will not, in any case or
in the aggregate, materially detract from the value of the assets subject
thereto or materially impair the operations of Parent and its subsidiaries
taken as a whole).
Except as may be required by the Securities Act, the Exchange Act, state
securities or "blue sky" laws, the Massachusetts Business Corporation Law, the
HSR Act and the rules of the NASD, neither Parent nor any Parent Subsidiary is
nor will be required to make any filing with or give any notice to, or to obtain
any Consent from, any Person in connection with the execution and delivery of
this Agreement or the consummation of the Merger.
3.22 VOTE REQUIRED. The affirmative vote of the holders of a majority of
the outstanding shares of Class A Common Stock of Parent (the "Requisite Vote")
is the only vote of the holders of any class or series of Parent's capital stock
necessary to adopt and approve this Agreement, the Merger and the transactions
contemplated thereby.
3.23 COMPANY ACTION. The Board of Directors of Parent (at a meeting duly
called and held) has (a) unanimously determined that the Merger is advisable and
fair and in the best interests of Parent and its shareholders, (b) unanimously
approved this Agreement and the Merger in accordance with the applicable
provisions of the Massachusetts Business Corporation Law, (c) unanimously
recommended the adoption and approval of this Agreement and the Merger by the
holders of Parent Common Stock and directed that this Agreement and the Merger
be submitted for consideration by the Parent's shareholders at the Parent
Shareholders' Meeting, and (d) adopted a resolution having the effect of causing
Parent not to be subject, to the extent permitted by applicable law, to any
state takeover law that may purport to be applicable to the Merger and the
transactions contemplated thereby.
3.24 FAIRNESS OPINION. Parent has received the written opinion of Needham
& Company, Inc., financial advisor to Parent, to the effect that the
consideration to be paid by Parent to the Company Shareholders in the Merger is
fair to the shareholders of Parent from a financial point of view.
3.25 FINDER'S FEE. Except for Needham & Company, Inc., no broker, finder
or investment banker is entitled to any brokerage, finder's or other fee or
commission in connection with the Merger or any of the other transactions
contemplated thereby based upon arrangements made by or on behalf of Parent or
any of its subsidiaries. The fees and commissions (other than reimbursement of
expenses) payable to Needham & Company, Inc. as contemplated by this Section
3.12 will not exceed $250,000. A copy of Parent's agreement with Needham &
Company, Inc. has been delivered to the Company.
3.26 FULL DISCLOSURE.
(a) This Agreement (including the Parent Disclosure Schedule) does
not, (i) contain any representation, warranty or information that is false
or misleading with respect to any material fact, or (ii) omit to state any
material fact necessary in order to make the representations, warranties
and information contained and to be contained herein and therein not false
or misleading.
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(b) The information supplied by Parent for inclusion in the Proxy
Statement (as defined in Section 5.5(a)) will not, as of the date of the
Proxy Statement or as of the date of the Parent Shareholders' Meeting (as
defined in Section 5.6), contain any statement that is inaccurate or
misleading with respect to any material fact, or (ii) omit to state any
material fact necessary in order to make such information not false or
misleading.
SECTION 4. CERTAIN COVENANTS OF THE COMPANY
4.1 ACCESS AND INVESTIGATION. During the period from the date of this
Agreement through the Effective Date (the "Pre-Closing Period"), the Company
shall, and shall cause its Representatives to: (a) provide Parent and Parent's
Representatives with reasonable access to the Company's Representatives,
personnel and assets and to all existing books, records, Tax Returns, work
papers and other documents and information relating to the Company and (b)
provide Parent and Parent's Representatives with such copies of the existing
books, records, Tax Returns, work papers and other documents and information
relating to the Company, and with such additional financial, operating and other
data and information regarding the Company, as Parent or its Representatives may
reasonably request.
4.2 OPERATION OF THE COMPANY'S BUSINESS. During the Pre-Closing Period,
except as contemplated by this Agreement or consented to by Parent in writing,
the Company shall:
(a) conduct its business and operations in the ordinary course and in
substantially the same manner as such business and operations have been
conducted prior to the date of this Agreement;
(b) use reasonable efforts to preserve intact its current business
organization, keep available the services of its current officers and
employees and maintain its relations and goodwill with all suppliers,
customers, landlords, creditors, employees and other Persons having
business relationships with the Company in each case, in all material
respects;
(c) use reasonable efforts to keep in full force all insurance
policies in effect as of the date of this Agreement;
(d) cause its chief executive officer to report regularly (but in no
event less frequently than weekly) to Parent concerning the status of the
Company's business;
(e) not declare, accrue, set aside or pay any dividend or make any
other distribution in respect of any shares of capital stock, and shall not
repurchase, redeem or otherwise reacquire any shares of capital stock or
other securities;
(f) not sell, issue or authorize the issuance of (i) any capital stock
or other security, (ii) any option, call, warrant or right to acquire, or
relating to, any capital stock or other security, or (iii) any instrument
convertible into or exchangeable for any capital stock or other security
(except that the Company shall be permitted to issue Company Common Stock
upon the exercise of outstanding Company Options or Company Warrants);
(g) not amend or waive any of its rights under, or authorize the
acceleration of vesting under (i) any provision of its Company Stock Plans,
(ii) any provision of any agreement evidencing any outstanding Company
Option or Company Warrant or (iii) any provision of any restricted stock
purchase agreement;
(h) not amend or permit the adoption of any amendment to the Company's
articles of incorporation or bylaws, or effect or permit the Company to
become a party to any Company Acquisition Transaction, recapitalization,
reclassification of shares, stock split, reverse stock split or similar
transaction;
(i) not form any subsidiary or acquire any equity interest or other
interest in any other Entity;
(j) not make any capital expenditure, except for capital expenditures
that, when added to all other capital expenditures made on behalf of the
Company during the Pre-Closing Period, do not exceed $100,000 in the
aggregate;
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(k) not (i) enter into or become bound by, or permit any of the assets
owned or used by it to become bound by, any Material Company Contract, or
(ii) amend or prematurely terminate, or waive any material right or remedy
under, any Material Company Contract;
(l) not (i) acquire, lease or license any material right or other
material asset from any other Person, (ii) sell or otherwise dispose of, or
lease or license, any material right or other material asset to any other
Person except that the Company may sell inventory in the ordinary course of
business, or (iii) waive or relinquish any right, except for immaterial
assets acquired, leased, licensed or disposed of by the Company pursuant to
Contracts that are not Material Company Contracts;
(m) not (i) lend money to any Person (other than ordinary advances for
travel and entertainment), or (ii) incur or guarantee any indebtedness in
excess of $100,000, except that the Company may make routine borrowings in
the ordinary course of business under its line of credit with Imperial Bank
or any other lines of credit disclosed in the Company Disclosure Schedule;
(n) not (i) establish, adopt or amend any Employee Benefit Plan, (ii)
pay any bonus or make any profit-sharing or similar payment to, or increase
the amount of the wages, salary, commissions, fringe benefits or other
compensation or remuneration payable to, any of its directors, officers or
employees except pursuant to agreements in effect on the date hereof, or
(iii) hire any new employee whose aggregate annual compensation is expected
to exceed $60,000, except that the Company may enter into employment
agreements with (i) Shareholder in the form attached hereto as Exhibit E
and (ii) Mr. Harris Ravine in the form attached hereto as Exhibit F.
(o) not change any of its methods of accounting or accounting
practices in any respect (except as otherwise required by generally
accepted accounting principles or any change therein);
(p) not make any Tax election;
(q) not commence or settle any Legal Proceeding;
(r) not make any prepayment of principal or interest, or otherwise
discharge amounts payable with respect to the Shareholder Debt;
(s) except as contemplated by this Agreement, not enter into any
material transaction or take any other material action outside the ordinary
course of business or inconsistent with its past practices; and
(t) not agree or commit to take any of the actions described in
clauses "(e)" through "(s)" of this Section 4.2.
4.3 NOTIFICATION; UPDATES TO COMPANY DISCLOSURE SCHEDULE.
(a) During the Pre-Closing Period, the Company shall promptly notify
Parent in writing of:
(i) the discovery by the Company of any event, condition, fact or
circumstance that occurred or existed on or prior to the date of this
Agreement and that caused or constitutes an inaccuracy in or breach of
any representation or warranty made by the Company in this Agreement;
(ii) any event, condition, fact or circumstance that occurs, arises
or exists after the date of this Agreement and that would cause or
constitute an inaccuracy in or breach of any representation or warranty
made by the Company in this Agreement if (A) such representation or
warranty had been made as of the time of the occurrence, existence or
discovery of such event, condition, fact or circumstance, or (B) such
event, condition, fact or circumstance had occurred, arisen or existed
on or prior to the date of this Agreement;
(iii) any breach of any covenant or obligation of the Company; and
(iv) any event, condition, fact or circumstance that would make the
timely satisfaction of any of the conditions set forth in Section 7 or
Section 8 impossible or unlikely.
(b) If any event, condition, fact or circumstance that is required to
be disclosed pursuant to Section 4.3(a) requires any change in the Company
Disclosure Schedule, or if any such event, condition,
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fact or circumstance would require such a change assuming the Company
Disclosure Schedule were dated as of the date of the occurrence, existence
or discovery of such event, condition, fact or circumstance, then the
Company shall promptly deliver to Parent an update to the Company
Disclosure Schedule specifying such change. No such update shall be deemed
to supplement or amend the Company Disclosure Schedule for the purpose of
(i) determining the accuracy of any of the representations and warranties
made by the Company in this Agreement, or (ii) determining whether any of
the conditions set forth in Section 7 has been satisfied.
4.4 NO SOLICITATION.
The Company shall not directly or indirectly, and shall not authorize
or permit any Representative of the Company directly or indirectly to, (i)
solicit, initiate, encourage or induce the making, submission or
announcement of any Acquisition Proposal or take any action that could
reasonably be expected to lead to an Acquisition Proposal, (ii) furnish any
information regarding the Company to any Person in connection with or in
response to an Acquisition Proposal, (iii) continue or engage in
discussions with any Person with respect to any Acquisition Proposal, (iv)
approve, endorse or recommend any Acquisition Proposal or (v) enter into
any letter of intent or similar document or Contract contemplating or
otherwise relating to any Company Acquisition Transaction.
4.5 TAX REPRESENTATION LETTER. As soon as practicable after the execution
of this Agreement, the Company shall deliver to Cooley Godward LLP and Palmer &
Dodge LLP, tax representation letters in customary form (which will be used and
relied upon in connection with the legal opinions contemplated by Section 7.9
and Section 8.9) and the Company shall use its best efforts to obtain and
deliver to Parent, Continuity of Interest Certificates signed by each
shareholder of the Company, each of which shall be in such customary form as is
reasonably required by each of Cooley Godward LLP and Palmer & Dodge LLP.
4.6 INDEPENDENT DIRECTORS. During the Escrow Period, Shareholder agrees
to vote his shares in favor of, and take other action appropriate to cause, the
election of at least two (2) "independent directors" (as such term is defined in
Rule 4460(c) of the Marketplace Rules of The Nasdaq Stock Market) to the Board
of Directors of the Company.
SECTION 5. CERTAIN COVENANTS OF PARENT
5.1 ACCESS AND INVESTIGATION. During the Pre-Closing Period, Parent
shall, and shall cause its Representatives to: (a) provide the Company and the
Company's Representatives with reasonable access to Parent's Representatives,
personnel and assets and to all existing books, records, Tax Returns, work
papers and other documents and information relating to Parent and each Parent
Subsidiary; and (b) provide the Company and the Company's Representatives with
such copies of the existing books, records, Tax Returns, work papers and other
documents and information relating to Parent and each Parent Subsidiary, and
with such additional financial, operating and other data and information
regarding Parent and each Parent Subsidiary, as the Company or its
Representatives may reasonably request.
5.2 OPERATION OF PARENT'S BUSINESS. During the Pre-Closing Period, except
as contemplated by this Agreement or consented to by the Company in writing,
Parent shall, and shall cause each Parent Subsidiary to:
(a) conduct its business and operations in the ordinary course and in
substantially the same manner as such business and operations have been
conducted prior to the date of this Agreement;
(b) use reasonable efforts to preserve intact its current business
organization, keep available the services of its current officers and
employees and maintain its relations and goodwill with all suppliers,
customers, landlords, creditors, employees and other Persons having
business relationships with Parent or any Parent Subsidiary in each case,
in all material respects;
(c) use reasonable efforts to keep in full force all insurance
policies in place as of the date of this Agreement;
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(d) cause its chief executive officer to report regularly (but in no
event less frequently than weekly) to the Company concerning the status of
Parent's business;
(e) not declare, accrue, set aside or pay any dividend or make any
other distribution in respect of any shares of capital stock, and shall not
repurchase, redeem or otherwise reacquire any shares of capital stock or
other securities (other than the surrender of options in connection with
terminations of employment);
(f) not sell, issue or authorize the issuance of (i) any capital stock
or other security, (ii) any option, call, warrant or right to acquire, or
relating to, any capital stock or other security, or (iii) any instrument
convertible into or exchangeable for any capital stock or other security
(except that Parent shall be permitted to issue Parent Common Stock upon
the exercise of outstanding Parent Options or Parent Warrants);
(g) not amend or waive any of its rights under, or authorize the
acceleration of vesting under, (i) any provision of its Stock Plans, (ii)
any provision of any agreement evidencing any outstanding Parent Option or
Parent Warrant, or (iii) any provision of any restricted stock purchase
agreement;
(h) except for the amendment necessary to authorize the additional
shares of Class A Common Stock to be issued as Merger Shares pursuant to
Section 1.5(a) of this Agreement, not amend or permit the adoption of any
amendment to its articles of organization or bylaws, or effect or permit
Parent or any Parent Subsidiary to become a party to any Parent Acquisition
Transaction, recapitalization, reclassification of shares, stock split,
reverse stock split or similar transaction;
(i) not form any subsidiary or acquire any equity interest or other
interest in any other Entity;
(j) not make any capital expenditure, except for capital expenditures
that, when added to all other capital expenditures made on behalf of Parent
or any Parent Subsidiary during the Pre-Closing Period, do not exceed
$100,000 in the aggregate;
(k) not (i) enter into or become bound by, or permit any of the assets
owned or used by it to become bound by, any Material Parent Contract, or
(ii) amend or prematurely terminate, or waive any material right or remedy
under, any Material Parent Contract;
(l) not (i) acquire, lease or license any material right or other
material asset from any other Person, (ii) sell or otherwise dispose of, or
lease or license, any material right or other material asset to any other
Person, except that Parent may dispose or attempt to dispose of the AS/400
Assets and sell inventory to the Company or otherwise in the ordinary
course of business, or (iii) waive or relinquish any right, except for
immaterial assets acquired, leased, licensed or disposed of by Parent
pursuant to Contracts that are not Material Parent Contracts;
(m) not (i) lend money to any Person (other than ordinary advances for
travel and entertainment), or (ii) incur or guarantee any indebtedness in
excess of $100,000, except that Parent and each Parent Subsidiary may make
routine borrowings in the ordinary course of business under its existing
lines of credit disclosed in the Parent SEC Documents;
(n) not (i) establish, adopt or amend any Employee Benefit Plan, (ii)
pay any bonus or make any profit-sharing or similar payment to, or increase
the amount of the wages, salary, commissions, fringe benefits or other
compensation or remuneration payable to, any of its directors, officers or
employees except pursuant to agreements in effect on the date hereof, or
(iii) hire any new employee whose aggregate annual compensation is expected
to exceed $60,000;
(o) not change any of its methods of accounting or accounting
practices in any respect (except as otherwise required by generally
accepted accounting principles or any change therein);
(p) not make any Tax election;
(q) not commence or settle any Legal Proceeding;
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(r) except as contemplated by this Agreement, not enter into any
material transaction or take any other material action outside the ordinary
course of business or inconsistent with its past practices; and
(s) not agree or commit to take any of the actions described in
clauses "(e)" through "(r)" of this Section 5.2.
5.3 NOTIFICATION; UPDATES TO PARENT DISCLOSURE SCHEDULE.
(a) During the Pre-Closing Period, Parent shall promptly notify the
Company in writing of:
(i) the discovery by Parent of any event, condition, fact or
circumstance that occurred or existed on or prior to the date of this
Agreement and that caused or constitutes an inaccuracy in or breach of
any representation or warranty made by Parent in this Agreement or an
inaccuracy in the Parent SEC Documents;
(ii) any event, condition, fact or circumstance that occurs, arises
or exists after the date of this Agreement and that would cause or
constitute an inaccuracy in or breach of any representation or warranty
made by Parent in this Agreement; if (A) such representation or warranty
had been made as of the time of the occurrence, existence or discovery
of such event, condition, fact or circumstance, or (B) such event,
condition, fact or circumstance had occurred, arisen or existed on or
prior to the date of this Agreement;
(iii) any breach of any covenant or obligation of Parent; and
(iv) any event, condition, fact or circumstance that would make the
timely satisfaction of any of the conditions set forth in Section 7 or
Section 8 impossible or unlikely.
(b) If any event, condition, fact or circumstance that is required to
be disclosed pursuant to Section 5.3(a) requires any change in the Parent
Disclosure Schedule, or if any such event, condition, fact or circumstance
would require such a change assuming the Parent Disclosure Schedule were
dated as of the date of the occurrence, existence or discovery of such
event, condition, fact or circumstance, then Parent shall promptly deliver
to the Company an update to the Parent Disclosure Schedule specifying such
change. No such update shall be deemed to supplement or amend the Parent
Disclosure Schedule for the purpose of (i) determining the accuracy of any
of the representations and warranties made by Parent in this Agreement, or
(ii) determining whether any of the conditions set forth in Section 8 has
been satisfied.
5.4 NO SOLICITATION. During the Pre-Closing Period:
(a) Parent shall not directly or indirectly, and shall not authorize
or permit any Parent Subsidiary or any Representative of Parent directly or
indirectly to, (i) solicit, initiate, encourage or induce the making,
submission or announcement of any Acquisition Proposal or take any action
that could reasonably be expected to lead to an Acquisition Proposal, (ii)
furnish any information regarding Parent or any Parent Subsidiary to any
Person in connection with or in response to an Acquisition Proposal, (iii)
continue or engage in discussions with any Person with respect to any
Acquisition Proposal, (iv) approve, endorse or recommend any Acquisition
Proposal or (v) enter into any letter of intent or similar document or any
Contract contemplating or otherwise relating to any Parent Acquisition
Transaction; provided, however, that this Section 5.4(a) shall not prohibit
Parent from furnishing information regarding Parent or any Parent
Subsidiary to, or entering into discussions with, any Person in response to
an unsolicited bona fide written proposed Acquisition Proposal submitted by
such Person if (1) the Board of Directors of Parent concludes in good
faith, based upon the written advice of its financial advisor, that such
Acquisition Proposal could reasonably be expected to result in a
transaction that is more favorable to Parent's shareholders than the Merger
(any such more favorable unsolicited bona fide written Acquisition Proposal
being referred to in this Agreement as a "Superior Proposal"), (2) the
Board of Directors of Parent concludes in good faith, based upon the
written advice of its outside legal counsel, that such action is required
in order for the Board of Directors of Parent to comply with its fiduciary
obligations to Parent's shareholders under applicable law, (3) prior to
furnishing any such information to, or entering into discussions with, such
Person, Parent gives the Company written notice of the identity of such
Person and
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of Parent's intention to furnish information to, or enter into discussions
with, such Person, and Parent receives from such Person an executed
confidentiality agreement containing customary limitations on the use and
disclosure of all written and oral information furnished to such Person by
or on behalf of Parent, and (4) prior to furnishing any such information to
such Person, Parent furnishes such information to the Company (to the
extent such information has not been previously furnished by Parent to the
Company). Without limiting the generality of the foregoing, Parent
acknowledges and agrees that any violation of any of the restrictions set
forth in the preceding sentence by any Representative of Parent, whether or
not such Representative is purporting to act on behalf of Parent, shall be
deemed to constitute a breach of this Section 5.4 by Parent.
(b) Parent shall promptly advise the Company orally and in writing of
any Acquisition Proposal (including the identity of the Person making or
submitting such Acquisition Proposal and the term thereof) that is made or
submitted by any Person during the Pre-Closing Period.
(c) Parent shall immediately cease and cause to be terminated any
discussions existing as of the date of this Agreement with any Person that
relate to any Acquisition Proposal.
5.5 PROXY STATEMENT.
(a) As promptly as practicable after the date of this Agreement,
Parent shall prepare and cause to be filed with the SEC a preliminary proxy
statement together with a form of proxy (collectively, the "Proxy
Statement") and any other documents required by the Securities Act or the
Exchange Act in connection with the Merger with respect to the Parent
Shareholders' Meeting at which the shareholders of Parent will be asked to
vote upon and approve this Agreement, the Merger and an amendment to
Parent's Articles of Organization increasing the authorized shares of
Parent Common Stock. Parent shall cause the Proxy Statement to comply with
the rules and regulations promulgated by the SEC, respond promptly to any
comments of the SEC or its staff and use all commercially reasonable
efforts to have the Proxy Statement cleared by the SEC under the Exchange
Act as promptly as practicable after such filing and promptly thereafter
file the definitive Proxy Statement with the SEC and mail the definitive
Proxy Statement to the shareholders of Parent. The Company shall promptly
furnish to Parent all information concerning the Company and its
shareholders as may be required or reasonably requested in connection with
the preparation of the Proxy Statement. Parent shall (i) notify the Company
promptly of the receipt of any comments from the SEC or its staff and of
any request by the SEC or its staff for amendments or supplements to the
Proxy Statement or for additional information and (ii) shall promptly
supply the Company with copies of all written correspondence with the SEC
or its staff with respect to the Proxy Statement. Parent shall not file any
amendment or supplement to the Proxy Statement to which the Company shall
have reasonably objected. Whenever any event occurs that should be set
forth in an amendment or supplement to the Proxy Statement, Parent or the
Company, as the case may be, shall promptly inform the other of such
occurrence and shall cooperate in filing with the SEC or its staff, and, if
appropriate, mailing to stockholders of Parent, such amendment or
supplement.
(b) Prior to the Effective Date, Parent shall make all required
filings with state regulatory authorities and the NASD, and shall ensure
that the Merger Shares will be qualified under the securities or "blue sky"
law of every jurisdiction of the United States in which any registered
shareholder of the Company has an address of record on the record date for
determining the shareholders entitled to notice of and to vote on the
Merger.
5.6 PARENT SHAREHOLDERS' MEETING.
(a) Parent shall take all action necessary in accordance with its
articles of organization, bylaws and applicable law to call, give notice
of, convene and hold a special meeting of the holders of Parent Common
Stock (the "Parent Shareholders' Meeting") to consider, act and vote upon
the adoption and approval of this Agreement and the Merger and an amendment
to Parent's Articles of Organization increasing the authorized shares of
Parent Common Stock. The Parent Shareholders' Meeting will be held as
promptly as practicable and in any event within 45 days after the Proxy
Statement has been cleared by the SEC or, if the SEC has not taken formal
action to clear the Proxy Statement, within 45
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days of filing the definitive Proxy Statement with the SEC. The Company
shall ensure that the Parent Shareholders' Meeting is called, convened,
held and conducted, and that all proxies solicited in connection with the
Parent Shareholders' Meeting are solicited in all material respects in
compliance with all applicable Legal Requirements. The Parent's obligation
to call, give notice of, convene and hold the Parent Stockholders' Meeting
in accordance with this Section 5.6(a) shall not be limited or otherwise
affected by the commencement, disclosure, announcement or submission to
Parent of any Acquisition Proposal, or by an withdrawal, amendment or
modification of the recommendation of the Board of Directors of Parent with
respect to this Agreement or the Merger.
(b) The Board of Directors of Parent has unanimously recommended (and
the Proxy Statement shall include a statement to the effect that the Board
of Directors of Parent has unanimously recommended) that the holders of
Parent Common Stock vote in favor and adopt and approve this Agreement, the
Merger and the amendment to Parent's Articles of Organization at the Parent
Shareholders' Meeting, which unanimous recommendation shall not be
withdrawn, amended or modified in a manner adverse to the Company. For
purposes of this Agreement, it shall constitute a modification adverse to
the Company if such recommendation shall no longer be unanimous.
(c) Notwithstanding the foregoing, nothing in Section 5.5 or in this
Section 5.6 shall prevent the Board of Directors of Parent from
withdrawing, amending or modifying its unanimous recommendation in favor of
this Agreement and the Merger and approval and adoption of this Agreement
and the amendment to Parent's Articles of Organization (and the Proxy
Statement may reflect such withdrawal, amendment or modification) if (i) a
Superior Proposal is made to Parent and is not withdrawn, (ii) the Board of
Directors of Parent shall conclude in good faith, based upon the written
advice of its outside legal counsel, that such withdrawal, amendment or
modification is required in order for the Board of Directors of the Company
to act in a manner that is consistent with its fiduciary obligations to
Parent's shareholders under applicable law, and (iii) neither Parent nor
any of its Representatives shall have violated any of the restrictions set
forth in Section 5.4(a). Nothing contained in this Section 5.6(c) shall
limit Parent's obligation to convene the Parent Shareholders' Meeting
(regardless of whether the unanimous recommendation of the Board of
Directors of Parent shall have been withdrawn, amended or modified).
5.7 TAX REPRESENTATION LETTERS. As soon as practicable after the
execution of this Agreement, Parent and Merger Sub shall deliver to Cooley
Godward LLP and Palmer & Dodge LLP, tax representation letters in customary form
(which will be used and relied upon in connection with the legal opinions
contemplated by Section 7.10 and Section 8.10).
5.8 TAX DISTRIBUTION TO COMPANY SHAREHOLDERS. Parent acknowledges and
agrees that the Company shall be entitled to make a distribution to its
shareholders immediately prior to the Closing Date in an amount equal to the
amount of any federal, state, local and foreign taxes payable by such
shareholders with respect to the earnings and profits of the Company for the
short S Corporation taxable year ending as of the Closing Date as estimated by
the Company and subject to the approval of Parent and Parent's accountants,
which approval shall not be unreasonably withheld. The Company shall deliver to
Parent and its accountants not less than five (5) days before the Closing Date
the Company's good faith estimate of the amount of such distribution and the
financial statement information on which it is based, and the Company and
Shareholder acknowledge that failure to provide such information can be reason
for Parent withholding its approval.
5.9 PARENT CONSULTANT. Parent may, in its discretion, retain Harris
Ravine to provide consulting services to Parent during the Pre-Closing Period at
a rate of up to $25,000 per month. The Company acknowledges that any services to
be provided by Mr. Ravine to Parent during this period to prepare for the
closing and the combination of the operations of the Company and Parent after
the Closing shall ultimately inure to the benefit of all of the parties. The
Company agrees to pay to Parent an amount equal to seventy-five percent (75%) of
any compensation payable by Parent to Harris Ravine for such services, which
payment shall be due and payable within three (3) business days of notice from
Parent of any payment due for such services; provided that any such amount
payable by the Company shall not exceed $18,750 per month and
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shall not be refundable if the Merger and the transactions contemplated hereby
are not completed for any reason.
SECTION 6. ADDITIONAL COVENANTS OF THE PARTIES
6.1 FILINGS AND CONSENTS. As promptly as practicable after the execution
of this Agreement, each party to this Agreement (a) shall make all filings (if
any) and give all notices (if any) required to be made and given by such party
in connection with the Merger and the other transactions contemplated by this
Agreement, and (b) shall use his or its commercially reasonable efforts to
obtain each Consent (if any) required to be obtained (pursuant to any applicable
Legal Requirement or Contract, or otherwise) by such party in connection with
the Merger or any of the other transactions contemplated by this Agreement. Each
party shall promptly deliver to the other party a copy of each such filing made,
each such notice given and each such Consent obtained by such parties during the
Pre-Closing Period.
6.2 PUBLIC ANNOUNCEMENTS. The parties shall consult with each other
before issuing any press release or otherwise making any public statements with
respect to the Merger and the transactions contemplated thereby. Without
limiting the generality of the foregoing, neither party shall (and neither party
shall permit any of its Representatives to) issue any press release or make any
public statement regarding this Agreement or the Merger, or regarding any of the
other transactions contemplated by this Agreement, without the other party's
prior consent, except that either party shall be permitted, without the consent
of the other party, to make such disclosures as are required to be made under
applicable law.
6.3 BEST EFFORTS. During the Pre-Closing Period, (a) the Company shall
use its best efforts to cause the conditions set forth in Section 7 to be
satisfied on a timely basis, and (b) Parent and Merger Sub shall use their best
efforts to cause the conditions set forth in Section 8 to be satisfied on a
timely basis.
6.4 REGULATORY APPROVALS. The Company and Parent shall use all reasonable
efforts to file, as soon as practicable after the date of this Agreement, all
notices, reports and other documents required to be filed with any Governmental
Body with respect to the Merger and the other transactions contemplated by this
Agreement, and to submit promptly any additional information requested by any
such Governmental Body. Without limiting the generality of the foregoing, the
Company and Parent shall, promptly after the date of this Agreement, prepare and
file the notifications, if any, required under the HSR Act in connection with
the Merger. The Company and Parent shall respond as promptly as practicable to
(i) any inquiries or requests received from the Federal Trade Commission or the
Department of Justice for additional information or documentation and (ii) any
inquiries or requests received from any state attorney general or other
Governmental Body in connection with antitrust or related matters. Each of the
Company and Parent shall (1) give the other party prompt notice of the
commencement of any Legal Proceeding by or before any Governmental Body with
respect to the Merger or any of the other transactions contemplated by this
Agreement, (2) keep the other party informed as to the status of any Legal
Proceeding, and (3) promptly inform the other party of any communication to or
from the Federal Trade Commission, the Department of Justice or any other
Governmental Body regarding the Merger. The Company and Parent will consult and
cooperate with one another, and will consider in good faith the views of one
another, in connection with any analysis, appearance, presentation, memorandum,
brief, argument, opinion or proposal made or submitted in connection with any
Legal Proceeding under or relating to the HSR Act or any other federal or state
antitrust or fair trade law. In addition, except as may be prohibited by any
Governmental Body or by any Legal Requirement, in connection with any Legal
Proceeding under or relating to the HSR Act or any other federal or state
antitrust or fair trade law or any other similar Legal Proceeding, each of the
Company and Parent agrees to permit authorized Representatives of the other
party to be present at each meeting or conference relating to any such Legal
Proceeding and to have access to and be consulted in connection with any
document, opinion or proposal made or submitted to any Governmental Body in
connection with any such Legal Proceeding.
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SECTION 7. CONDITIONS PRECEDENT TO OBLIGATIONS OF PARENT AND MERGER SUB
The obligations of Parent and Merger Sub to effect the Merger and otherwise
consummate the transactions contemplated by this Agreement are subject to the
satisfaction, at or prior to the Closing, of each of the following conditions:
7.1 ACCURACY OF REPRESENTATIONS. The representations and warranties made
by the Company in this Agreement and in each of the other agreements and
instruments delivered to Parent in connection with the transactions contemplated
by this Agreement shall have been accurate in all material respects as of the
date of this Agreement (without giving double effect to any "Material Adverse
Effect" or other materiality qualifications contained in such representations
and warranties), and shall be accurate in all material respects as of the
Closing Date as if made at the Closing Date (without giving effect to any update
to the Company Disclosure Schedule except as to matters previously approved by
Parent in writing and without giving double effect to any "Material Adverse
Effect" or other materiality qualifications contained in such representations
and warranties).
7.2 PERFORMANCE OF COVENANTS. Each covenant or obligation that the
Company is required to comply with or to perform at or prior to the Closing
shall have been complied with and performed in all respects.
7.3 NO MATERIAL ADVERSE EFFECT. Since the date of this Agreement, there
shall have been no Material Adverse Effect on the Company and there shall not
have occurred any change or development, or any combination of changes or
developments, that would reasonably be expected to have a Material Adverse
Effect on the Company.
7.4 COMPLIANCE CERTIFICATE. The Company shall have delivered to Parent a
certificate of the Chief Executive Officer of the Company evidencing compliance
with the conditions set forth in Sections 7.1, 7.2 and 7.3.
7.5 SHAREHOLDER APPROVAL. The terms of the Merger and this Agreement
shall have been adopted and approved by the Requisite Vote of Parent's
shareholders.
7.6 CONSENTS. All Consents required to be obtained in connection with the
Merger and the other transactions contemplated by this Agreement (including the
Consents identified in Part 2.21 of the Company Disclosure Schedule and Part
3.21 of the Parent Disclosure Schedule) shall have been obtained and shall be in
full force and effect.
7.7 TAX REPRESENTATION LETTER; CONTINUITY OF INTEREST
CERTIFICATES. Parent shall have received from the Company a tax representation
letter and from each of the shareholders of the Company Continuity of Interest
Certificates as contemplated by Section 4.5;
7.8 LEGAL OPINION. Parent shall have received a legal opinion of Cooley
Godward LLP, in the form of Exhibit G, dated as of the Closing Date;
7.9 TAX OPINION. Parent shall have received a legal opinion of Palmer &
Dodge LLP, counsel to Parent, addressed to the Parent, dated as of the Closing
Date, to the effect that the Merger will constitute a reorganization within the
meaning of Section 368(a) of the Code and no gain or loss will be recognized by
Parent or the Company as a result of the issuance of Parent Common Stock
pursuant to this Agreement (it being understood that, in rendering such opinion,
Palmer & Dodge, LLP may rely upon the tax representation letters and continuity
of interest certificates referred to in Section 4.5 and Section 5.7);
7.10 STOCK REPRESENTATION LETTER. Parent shall have received from each
shareholder of the Company entitled to receive shares of Parent Common Stock
pursuant to Section 1.5 an executed stock representation letter in the form of
Exhibit H in connection with compliance with the exemption from registration
under Section 5 of the Securities Act contained in Section 4(2) of the
Securities Act and/or Regulation D promulgated thereunder.
7.11 IMPERIAL BANK CREDIT LINE AMENDMENT. The Company shall have obtained
all consents to the Merger from Imperial Bank as are reasonably required to
permit the Company to maintain its line of credit with Imperial Bank
substantially in the form in which it is currently maintained with such
amendment as
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Parent may reasonably request in light of the fact that the status of the
Company after the Closing will be that of a C corporation .
7.12 NO RESTRAINTS. No temporary restraining order, preliminary or
permanent injunction or other order preventing the consummation of the Merger
shall have been issued by any court of competent jurisdiction and remain in
effect, and there shall not be any Legal Requirement enacted or deemed
applicable to the Merger that makes consummation of the Merger illegal.
7.13 NO GOVERNMENTAL LITIGATION. There shall not be pending or threatened
any Proceeding in which a Governmental Authority is or is threatened to become a
party: (a) challenging or seeking to restrain or prohibit the consummation of
the Merger or any of the transactions contemplated thereby; (b) relating to the
Merger and seeking to obtain from Parent or the Company or any of their
respective subsidiaries any damages that may be material to Parent and the
Parent Subsidiaries taken as a whole or the Company; (c) seeking to prohibit or
limit in any material respect Parent's ability to vote, receive dividends with
respect to or otherwise exercise ownership rights with respect to the stock of
the Surviving Corporation; or (d) which would materially and adversely affect
the right of Parent, the Surviving Corporation or any subsidiary of Parent to
own the assets or operate the business of the Company.
7.14 NO OTHER LITIGATION. There shall not be pending any Proceeding in
which there is a reasonable possibility of an outcome that would have a Material
Adverse Effect on Parent and the Parent Subsidiaries taken as a whole or the
Company: (a) challenging or seeking to restrain or prohibit the consummation of
the Merger or any of the transactions contemplated thereby; (b) relating to the
Merger and seeking to obtain from Parent or the Company or any of their
respective subsidiaries any damages that may be material to Parent and the
Parent Subsidiaries taken as a whole or the Company; (c) seeking to prohibit or
limit in any material respect Parent's ability to vote, receive dividends with
respect to or otherwise exercise ownership rights with respect to the stock of
the Surviving Corporation; or (d) which would affect adversely the right of
Parent, the Surviving Corporation or any subsidiary of Parent to own the assets
or operate the business of the Company.
7.15 HSR ACT. If applicable, the waiting period applicable to the
consummation of the Merger under the HSR Act shall have expired or been
terminated.
7.16 LOCK-UP AGREEMENT. Shareholder shall have executed and delivered to
Parent a lock-up agreement in the form of Exhibit I.
7.17 ESCROW AGREEMENT. Parent, the Company Shareholders, the Shareholders
Representative and the Escrow Agent shall have entered into an escrow agreement
in the form of Exhibit D.
7.18 NONCOMPETITION AGREEMENT. Shareholder shall have executed and
delivered to Parent a noncompetition agreement in the form of Exhibit J.
7.19 LISTING. After giving effect to the Merger, the Parent Common Stock
shall be listed or quoted on The Nasdaq National Market, The Nasdaq SmallCap
Market or a national exchange.
SECTION 8. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE COMPANY
The obligations of the Company to effect the Merger and otherwise
consummate the transactions contemplated by this Agreement are subject to the
satisfaction, at or prior to the Closing, of each of the following conditions:
8.1 ACCURACY OF REPRESENTATIONS. The representations and warranties made
by Parent and Merger Sub in this Agreement and in each of the other agreements
and instruments delivered to the Company in connection with the transactions
contemplated by this Agreement shall have been accurate in all material respects
as of the date of this Agreement (without giving double effect to any "Material
Adverse Effect" or other materiality qualifications contained in such
representations and warranties), and shall be accurate in all material respects
as of the Closing Date as if made at the Closing Date (without giving effect to
any update to the Parent Disclosure Schedule except as to matters previously
approved by the Company in writing and without giving double effect to any
"Material Adverse Effect" or other materiality qualifications contained in such
representations and warranties).
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8.2 PERFORMANCE OF COVENANTS. Each covenant or obligation that Parent
and/or Merger Sub is required to comply with or to perform at or prior to the
Closing shall have been complied with and performed in all respects.
8.3 NO MATERIAL ADVERSE EFFECT. Since the date of this Agreement, there
shall have been no Material Adverse Effect on Parent and the Parent Subsidiaries
taken as a whole and there shall not have occurred any change or development, or
any combination of changes or developments, that would reasonably be expected to
have a Material Adverse Effect on Parent and the Parent Subsidiaries taken as a
whole.
8.4 COMPLIANCE CERTIFICATE. Parent shall have delivered to the Company a
certificate of the Chief Executive Officer of Parent evidencing compliance with
the conditions set forth in Sections 8.1, 8.2 and 8.3.
8.5 SHAREHOLDER APPROVAL. The terms of the Merger and this Agreement
shall have been adopted and approved by the Requisite Vote of Parent's
shareholders.
8.6 CONSENTS. All Consents required to be obtained in connection with the
Merger and the other transactions contemplated by this Agreement (including the
Consents identified in Part 2.21 of the Company Disclosure Schedule and Part
3.21 of the Parent Disclosure Schedule) shall have been obtained and shall be in
full force and effect.
8.7 LEGAL OPINION. The Company shall have received a legal opinion of
Palmer & Dodge LLP, dated as of the Closing Date, in the form of Exhibit K;
8.8 TAX REPRESENTATION LETTER. The Company shall have received from
Parent and Merger Sub a tax representation letter as contemplated by Section
5.7.
8.9 TAX OPINION. The Company shall have received a legal opinion of
Cooley Godward LLP, dated as of the Closing Date, addressed to the Company, to
the effect that the Merger will constitute a reorganization within the meaning
of Section 368(a) of the Code and no gain or loss will be recognized by the
Company or its shareholders as a result of the transactions contemplated by this
Agreement (it being understood that, in rendering such opinion, Cooley Godward
LLP may rely upon the tax representation letters and Continuity of Interest
Certificates referred to in Section 4.5 and Section 5.7);
8.10 EMPLOYMENT AGREEMENT. Mr. Harris Ravine shall have executed and
delivered to the Company an employment agreement in the form of Exhibit F.
8.11 NO RESTRAINTS. No temporary restraining order, preliminary or
permanent injunction or other order preventing the consummation of the Merger
shall have been issued by any court of competent jurisdiction and remain in
effect, and there shall not be any Legal Requirement enacted or deemed
applicable to the Merger that makes consummation of the Merger illegal.
8.12 NO GOVERNMENTAL LITIGATION. There shall not be pending or threatened
any Proceeding in which a Governmental Authority is or is threatened to become a
party: (a) challenging or seeking to restrain or prohibit the consummation of
the Merger or any of the transactions contemplated thereby; (b) relating to the
Merger and seeking to obtain from Parent or the Company or any of their
respective subsidiaries any damages that may be material to Parent and the
Parent Subsidiaries taken as a whole or the Company; (c) seeking to prohibit or
limit in any material respect Parent's ability to vote, receive dividends with
respect to or otherwise exercise ownership rights with respect to the stock of
the Surviving Corporation; or (d) which would materially and adversely affect
the right of Parent, the Surviving Corporation or any subsidiary of Parent to
own the assets or operate the business of the Company.
8.13 NO OTHER LITIGATION. There shall not be pending any Proceeding in
which there is a reasonable possibility of an outcome that would have a Material
Adverse Effect on Parent and the Parent Subsidiaries taken as a whole or the
Company: (a) challenging or seeking to restrain or prohibit the consummation of
the Merger or any of the transactions contemplated thereby; (b) relating to the
Merger and seeking to obtain from Parent or the Company or any of their
respective subsidiaries any damages that may be material to Parent and the
Parent Subsidiaries taken as a whole or the Company; (c) seeking to prohibit or
limit in any material respect Parent's ability to vote, receive dividends with
respect to or otherwise exercise ownership rights with
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respect to the stock of the Surviving Corporation; or (d) which would affect
adversely the right of Parent, the Surviving Corporation or any subsidiary of
Parent to own the assets or operate the business of the Company.
8.14 HSR ACT. If applicable, the waiting period applicable to the
consummation of the Merger under the HSR Act shall have expired or been
terminated.
8.15 TAX DISTRIBUTION TO COMPANY SHAREHOLDERS. The Company shall have
paid to the shareholders of the Company the amounts equal to the amount of taxes
contemplated by Section 5.9.
8.16 NONCOMPETITION AGREEMENT. Parent shall have executed and delivered
to Shareholder a noncompetition agreement in the form of Exhibit J.
8.17 LISTING. After giving effect to the Merger, the Parent Common Stock
shall be listed or quoted on The Nasdaq National Market, The Nasdaq SmallCap
Market or a national exchange.
SECTION 9. TERMINATION
9.1 TERMINATION. This Agreement may be terminated prior to the Effective
Date:
(a) by mutual written consent of Parent and the Company;
(b) by either Parent or the Company if the Merger shall not have been
consummated by July 31, 1997 (unless the failure to consummate the Merger
is attributable to a failure on the part of the party seeking to terminate
this Agreement to perform any material obligation required to be performed
by such party at or prior to the Effective Date);
(c) by either Parent or the Company if a court of competent
jurisdiction or other Governmental Body shall have issued a final and
nonappealable order, decree or ruling, or shall have taken any other
action, having the effect of permanently restraining, enjoining or
otherwise prohibiting the Merger;
(d) by either Parent or the Company if the Parent Shareholders'
Meeting shall have been held and this Agreement and the Merger shall not
have been adopted and approved at such meeting by the Requisite Vote;
(e) by the Company (at any time prior to the adoption and approval of
this Agreement and the Merger by the Requisite Vote) if a Triggering Event
shall have occurred; or
(f) by Parent if the Board of Directors of Parent shall withdraw its
recommendation in favor of this Agreement pursuant to Section 5.6(c);
provided, however, that Parent shall not be permitted to terminate this
Agreement pursuant to this Section 9.1(f) unless Parent shall have paid the
fee referred to in Section 9.3(b).
(g) by either party if any of the other party's representations and
warranties contained in this Agreement shall be or shall have become
materially inaccurate, or if any of the other party's covenants contained
in this Agreement shall have been breached in any material respect;
provided, however, that if an inaccuracy in a party's representations and
warranties or a breach of a covenant by a party is curable by such party
and such party is continuing to exercise all reasonable efforts to cure
such inaccuracy or breach, then the breaching party shall have thirty (30)
days from the time of receipt of written notice from the nonbreaching party
of such breach or inaccuracy to cure such breach and if it is not cured
within such thirty (30) day period, the nonbreaching party may terminate
this Agreement under this Section 9.1(g) on account of such inaccuracy or
breach.
9.2 EFFECT OF TERMINATION. In the event of the termination of this
Agreement as provided in Section 9.1, this Agreement shall be of no further
force or effect; provided, however, that (i) this Section 9.2, Section 9.3,
Section 6.2 and Section 12 shall survive the termination of this Agreement and
shall remain in full force and effect, and (ii) the termination of this
Agreement shall not relieve any party from any liability for any breach of this
Agreement.
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9.3 FEES AND EXPENSES; TERMINATION FEES.
(a) Except as set forth in this Section 9.3, each party to this
Agreement shall bear and pay all fees, costs and expenses (including legal
fees and accounting fees) that have been incurred or that are incurred in
the future by such party in connection with the transactions contemplated
by this Agreement, including all fees, costs and expenses incurred by such
party in connection with or by virtue of (a) the investigation and review
conducted by such party (or its Representatives) with respect to the other
party's business (and the furnishing of information to the other party and
its Representatives in connection with such investigation and review), (b)
the negotiation, preparation and review of this Agreement and all
agreements, certificates, opinions and other instruments and documents
delivered or to be delivered in connection with the transactions
contemplated by this Agreement, (c) the preparation and submission of any
filing or notice required to be made or given in connection with any of the
transactions contemplated by this Agreement, and the obtaining of all
Consents and Governmental Authorizations required to be obtained in
connection with any of such transactions, and (d) the consummation of the
Merger.
(b) If this Agreement is terminated by the Company pursuant to Section
9.1(e) or by Parent pursuant to Section 9.1(f), Parent shall pay to the
Company, in cash (at the time specified in Section 9.3(c)), a nonrefundable
fee in the amount of $550,000.
(c) In the case of termination of this Agreement by Parent pursuant to
Section 9.1(f), the fee referred to in Section 9.3(b) shall be paid by
Parent prior to such termination, and in the case of termination of this
Agreement by the Company pursuant to Section 9.1(e), the fee referred to in
Section 9.3(b) shall be paid by Parent to the Company within three (3)
business days after such termination.
SECTION 10. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; INDEMNIFICATION.
10.1 SURVIVAL OF COMPANY REPRESENTATIONS AND WARRANTIES. The
representations and warranties made by the Company herein (including the
representations and warranties set forth in Section 2 or contained in any
certificate delivered by an officer of the Company) shall survive the Closing
and shall expire on the first anniversary of the Closing Date (the "Expiration
Date"); provided, however, that if, at any date prior to the Expiration Date,
Parent (acting in good faith) delivers to the Company a written notice alleging
the existence of an inaccuracy in or a breach of any of the representations or
warranties made by the Company (and setting forth in reasonable detail the basis
for Parent's belief that such an inaccuracy or breach may exist) and asserting a
claim for recovery under Section 10.3 based on such alleged inaccuracy or
breach, then the claim asserted in such notice shall survive the Expiration Date
until such date as such claim is fully and finally resolved. The
representations, warranties, covenants and obligations of the Company and the
rights and remedies that may be exercised by Parent shall not be limited or
otherwise affected by or as a result of any information furnished to, or any
investigation made by or knowledge of, the Parent; provided, however, that there
shall be no liability for any matter disclosed to Parent pursuant to Section 4.3
and which Parent expressly waives in writing as a condition to closing. For
purposes of this Agreement, each statement or other item of information set
forth in the Company Disclosure Schedule or in any update to the Company
Disclosure Schedule shall be deemed to be a representation and warranty made by
the Company in this Agreement.
10.2 SURVIVAL OF PARENT AND MERGER SUB REPRESENTATIONS AND
WARRANTIES. The representations and warranties made by Parent and Merger Sub
herein (including the representations and warranties set forth in Section 3 or
contained in any certificate delivered by an officer of Parent) shall survive
the Closing and shall expire on the Expiration Date; provided however, that if,
at any date prior to the Expiration Date, any Company Shareholder (acting in
good faith) delivers to Parent a written notice alleging the existence of an
inaccuracy in or a breach of any of the representations or warranties made by
Parent or Merger Sub (and setting forth in reasonable detail the basis for such
Company Shareholder's belief that such an inaccuracy or breach may exist) and
asserting a claim for recovery under Section 10.4 based on such alleged
inaccuracy or breach, then the claim asserted in such notice shall survive the
Expiration Date until such date as such claim is fully and finally resolved. The
representations, warranties, covenants and obligations of the Parent and
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Merger Sub and the rights and remedies that may be exercised by the Company
Shareholders, shall not be limited or otherwise affected by or as a result of
any information furnished to, or any investigation made by or knowledge of, the
Company Shareholders; provided, however, that there shall be no liability for
any matter disclosed to the Company pursuant to Section 5.3 and which the
Company expressly waives in writing as a condition to closing. For purposes of
this Agreement, each statement or other item of information set forth in the
Parent Disclosure Schedule or in any update to the Parent Disclosure Schedule
shall be deemed to be a representation and warranty made by Parent and Merger
Sub in this Agreement.
10.3 INDEMNIFICATION BY COMPANY SHAREHOLDERS. Subject to the limitations
contained in Section 10.1, this Section 10.3 and Section 10.7, from and after
the Effective Date, the Company Shareholders shall hold harmless and indemnify
Parent from and against, and shall compensate and reimburse Parent for, any
Damages which are directly or indirectly suffered or incurred by Parent or to
which Parent may otherwise become subject (regardless of whether or not such
Damages relate to any third-party claim) and which arise from or as a result of,
or are directly or indirectly connected with any inaccuracy in or breach of any
representation or warranty made by the Company or the Shareholder in Section 2.
Notwithstanding the foregoing, Parent's sole recourse for any Damages with
respect to which indemnification is sought under this Section 10 (other than
Damages determined by a court of competent jurisdiction in a proceeding from
which no further appeal is permitted to be taken to have been primarily caused
by fraud or intentional misrepresentation) shall be to the Shareholders
Indemnity Shares. In no event shall a Company Shareholder's liability for any
Damages with respect to which indemnification is sought be in excess of such
Company Shareholder's pro rata amount of the Shareholders Indemnity Shares and
no Company Shareholder shall have any personal liability for any Damages except
with respect to Damages determined by a court of competent jurisdiction in a
proceeding from which no further appeal is permitted to be taken to have been
primarily caused by fraud or intentional misrepresentation or intentional breach
by such Company Shareholder.
10.4 INDEMNIFICATION BY PARENT AND MERGER SUB. Subject to the limitations
contained in Sections 10.2, this Section 10.4 and Section 10.7, from and after
the Effective Date, Parent shall hold harmless and indemnify each of the Company
Shareholders from and against, and shall compensate and reimburse each of the
Company Shareholders for, any Damages which are directly or indirectly suffered
or incurred by any of the Company Shareholders or to which any of the Company
Shareholders may otherwise become subject (regardless of whether or not such
Damages relate to any third-party claim) and which arise from or as a result of,
or are directly or indirectly connected with any inaccuracy in or breach of any
representation or warranty made by Parent or Merger Sub in Section 3.
Notwithstanding the foregoing, a Company Shareholder's sole recourse for any
Damages with respect to which indemnification is sought under this Section 10
(other than Damages determined by a court in a proceeding from which no further
appeal is permitted to be taken to have been primarily caused by fraud or
intentional misrepresentation) shall be to the Parent Indemnity Shares.
10.5 VALUATION OF INDEMNITY SHARES. The value of the Shareholders
Indemnity Shares or the Parent Indemnity Shares, as the case may be, on any
specific date (the "Determination Date") shall be equal to (i) the number of
Shareholders Indemnity Shares or Parent Indemnity Shares, as the case may be,
multiplied by (ii) the average of the closing sales prices of the Parent Common
Stock as quoted on the Nasdaq Stock Market (the "Nasdaq Market") or any other
market on which such shares are then traded for the ten (10) trading day period
commencing five (5) trading days immediately prior to and including the
Effective Date and ending five (5) trading days immediately following the
Effective Date.
10.6 NOTICE; DEFENSE OF CLAIM.
(a) If any party entitled to indemnification under Section 10.3 or
Section 10.4 (which for purposes of this Section 10.6 shall include the
Surviving Corporation and Parent) (the "Indemnified Party") shall receive
notice or otherwise learn of the assertion by any other Person of any claim
or of the commencement by any such Person of any action (a "Third Party
Claim") with respect to which a party may be obligated to provide
indemnification pursuant to Section 10.3 or Section 10.4 (the "Indemnifying
Party"), such Indemnified Party shall give written notice thereof to the
Indemnifying Party within ten (10) business days after becoming aware of
such Third Party Claim; provided, however, that the failure
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of any Indemnified Party to give notice as provided in this Section 10.6
shall not relieve the Indemnifying Party of its obligations under Section
10.3 or Section 10.4, as the case may be, except to the extent that the
Indemnifying Party actually is prejudiced by such failure to give notice.
Such notice shall describe the Third Party Claim in reasonable detail, and
shall indicate the amount (estimated if necessary) of the Damages that has
been or may be sustained by such Indemnified Party. Thereafter, such
Indemnified Party shall deliver to the Indemnifying Party within 5 business
days after the Indemnified Party's receipt thereof, copies of all notices
and documents received by the Indemnified Party relating to the Third Party
Claim (including court papers).
(b) If, promptly after receipt by the Indemnifying Party of notice of
any Third Party Claim as provided in Section 10.6(a), the Indemnifying
Party shall give written notice to the Indemnified Party stating that it
intends to assume the defense thereof, at its own cost, then the defense of
such Third Party Claim, including selection of counsel reasonably
satisfactory to the Indemnified Party, shall be by the Indemnifying Party
and the Indemnified Party shall make no payment on such Third Party Claim
as long as the Indemnifying Party is conducting a good faith and diligent
defense. The Indemnified Party shall make available all information and
assistance that the Indemnifying Party may reasonably request and shall
cooperate with the Indemnifying party in such defense. Notwithstanding the
foregoing, the Indemnified Party shall at all times have the right to fully
participate in such defense at its own expense directly or through counsel.
If no such notice to assume the defense against a Third Party Claim is
received by the Indemnified Party from the Indemnifying Party, the
Indemnified Party shall, at the expense of the Indemnifying Party,
undertake the defense of such Third Party Claim, with counsel selected by
the Indemnified Party, and shall have the right to compromise or settle the
same exercising reasonable judgment.
(c) If the Company Shareholders choose to defend or to seek to
compromise or settle any Third Party Claim, Parent shall make available to
the Company Shareholders any personnel or any books, records or other
documents within its control or which it otherwise has the ability to make
available that are necessary or appropriate for such defense, settlement or
compromise, and shall otherwise cooperate in the defense, settlement or
compromise of such Third Party Claim.
(d) No Third Party Claim made against any Indemnified Party shall be
settled without the prior written consent of the Indemnifying Party.
Notwithstanding anything else in this Section 10.6 to the contrary, neither
any Company Shareholder nor Parent shall settle or compromise any Third
Party Claim unless such settlement or compromise contemplates as an
unconditional term thereof of the giving by such claimant or plaintiff to
each related Company Shareholder or Parent, as the case may be, a written
release from all liability with respect to such Third Party Claim.
10.7 FURTHER LIMITATIONS ON INDEMNIFICATION. Notwithstanding the
foregoing, the right to indemnication under this Section 10 shall be subject to
the following:
(a) No Indemnifying Party shall have liability under Section 10.3 or
Section 10.4 except to the extent that the Damages exceed $50,000 in the
aggregate, in which event the Indemnifying Party shall be liable for all
Damages, subject to the provisions of this Section 10.
(b) No indemnification shall be payable pursuant to Sections 10.3 or
10.4, as the case may be, after the Expiration Date, except (i) for claims
for Damages made prior to the Expiration Date but not then resolved, (ii)
for claims for Damages made with respect to an inaccuracy or breach of any
representation or warranty contained in Sections 2.14 or 3.14, which
representations and warranties shall survive until the expiration of the
applicable statute of limitations, or Sections 2.3, 2.20, 3.2, and 3.20,
which representations and warranties shall survive indefinitely.
(c) All indemnification claims made under Section 10.3 shall be
satisfied in full by the cancellation of that number of Shareholders
Indemnity Shares having a value determined in accordance with Section 10.5
equal to the amount of Damages for which such Indemnified Party is entitled
to indemnification under this Section 10 and all indemnification claims
made under Section 10.4 shall be satisfied in full by the issuance by
Parent of that number of Parent Indemnity Shares having a value determined
in
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accordance with Section 10.5 equal to the amount of Damages for which such
Indemnified Party is entitled to indemnification under this Section 10 pro
rata to the holders of Company Common Stock immediately prior to the
Effective Date.
(d) The limitations of Sections 10.7(a), 10.7(b) and 10.7(c) shall not
apply to any claim for Damages that are determined by a court of competent
jurisdiction in a proceeding from which no further appeal is permitted to
be taken to have been primarily caused by fraud or intentional
misrepresentation or intentional breach of any party.
(e) In determining the amount of any indemnity under Section 10.3 or
10.4, the Damages shall be reduced (including, without limitation,
retroactively) by any insurance proceeds, tax benefit or other similar
recovery or offset realized, directly or indirectly, by the Indemnified
Party actually recovered by or on behalf of such Indemnified Party in
reduction of the loss giving rise to the claim for Damages.
(f) Parent shall not be obligated to issue any of the Parent Indemnity
Shares pursuant to this Section 10 until Parent has received from each of
the Company Shareholders to which such Parent Indemnity Shares are to be
issued an executed stock representation letter substantially in the form of
Exhibit H, and Parent has placed on all certificates representing such
shares all appropriate legends.
10.8 ISSUANCE OF PARENT INDEMNITY SHARES TO SATISFY CLAIMS FOR DAMAGES.
(a) If a Company Shareholder has incurred or suffered Damages for
which it is entitled to indemnification under this Section 10, such Company
Shareholder, shall, on or prior to the Expiration Date, give written notice
of such claim (a "Claim Notice") to Parent. Each Claim Notice shall state
the amount of claimed Damages (the "Claimed Amount") and the basis for such
claim. No Company Shareholder shall make any claim for Damages after the
Expiration Date.
(b) Within ten (10) days of receipt of a Claim Notice, Parent shall
provide to the Company Shareholder, a written response (the "Response
Notice") in which Parent shall (i) agree that the full Claimed Amount is
valid, (ii) agree that part, but not all, of the Claimed Amount (the
"Agreed Amount") is valid, or (iii) contest that any of the Claimed Amount
is valid. Parent may contest a Claimed Amount only based upon a good faith
belief that all or such portion of the Claimed Amount does not constitute
Damages for which the Company Shareholder is entitled to indemnification
under this Section 10. If no response notice is delivered by Parent within
such ten (10) day period, Parent shall be deemed to have agreed that the
Claimed Amount is valid and that the Company Shareholder is entitled to
indemnification under this Section 10.
(c) If Parent in the Response notice agrees or is deemed to have
agreed that the Claimed Amount is valid, Parent shall promptly following
the required delivery date for the Response Notice issue to the Company
Shareholders who have incurred such Damages, that number of Parent
Indemnity Shares sufficient to satisfy the Claimed Amount, as determined
pursuant to Section 10.5.
(d) If Parent in the Response Notice agrees that part, but not all, of
the Claimed Amount is valid, Parent shall promptly following the required
delivery date for the Response Notice issue to the Company Shareholders who
have incurred such Damages, that number of Parent Indemnity Shares
sufficient to satisfy the Agreed Amount, as determined pursuant to Section
10.5.
(e) If Parent in the Response notice contests the release of all or a
part of the Claimed Amount (the "Contested Amount"), Parent shall continue
to maintain in reserve that number of Parent Indemnity Shares necessary to
satisfy the Contested Amount, as determined pursuant to Section 10.5,
notwithstanding the occurrence of the Expiration Date, until (i) such time
as the Company Shareholders shall agree in writing as to the number of
Parent Indemnity Shares to be issued to the Company Shareholders, if any,
or (ii) receipt by Parent of a copy of a court order setting forth
instructions to Parent as to the number of Parent Indemnity Shares to be
issued to the Company Shareholders, if any.
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SECTION 11. REGISTRATION OF THE MERGER SHARES; COMPLIANCE WITH THE SECURITIES
ACT
11.1 REGISTRATION PROCEDURES AND EXPENSES. Parent shall:
(a) as soon as practicable (but in any event within three hundred
(300) days following the issuance of the Merger Shares pursuant to Section
1.5(a) (the "Issuance"), prepare and file with the SEC a registration
statement on Form S-3 or, in the event Parent is not eligible to use Form
S-3, on Form S-1 or any other form then available for the registration of
the Merger Shares (the "Registration Statement"), in order to register with
the SEC the resale of the Merger Shares by the Company Shareholders from
time to time through underwriters, agents or otherwise, in negotiated or
market transactions or through the automated quotation system of the Nasdaq
or the facilities of any national securities exchange on which Parent's
Common Stock is then traded or in privately negotiated transactions;
provided, however, that the number of Merger Shares that may be resold
shall be subject to the Lock-Up Agreement;
(b) use reasonable efforts, subject to the receipt of necessary
information from the Company Shareholders, to cause the Registration
Statement to become effective promptly after such Registration Statement is
filed by Parent with the SEC; provided, however, that Parent shall cause
the effectiveness of the Registration Statement to be delayed until such
date that is six (6) months from the date of the Closing;
(c) use reasonable efforts to prepare and file with the SEC such
amendments and supplements to each Registration Statement and each
prospectus used in connection therewith as may be necessary to keep the
Registration Statement effective for a period of five (5) years following
the Issuance (the "Registration Period") or, if earlier, until all of the
Merger Shares have been sold pursuant thereto; provided, however, that
Parent shall not be deemed to have used reasonable efforts to keep the
Registration Statement effective if it voluntarily takes any action that
would result in the Company Shareholders not being able to sell any of
their respective Merger Shares pursuant to the Registration Statement
unless (i) such action is required under applicable law or taken by Parent
in good faith and for valid business reasons, including without limitation
the acquisition or divestiture of assets and (ii) Parent promptly (but in
any event within 30 days) files such amendments and supplements with the
SEC; provided, further, however, that Parent may not exercise its rights
under this Section 11.1(c) more frequently than one time in any
twelve-month period;
(d) furnish to the Company Shareholders with respect to the Merger
Shares registered under the Registration Statement such number of copies of
the Registration Statement (and exhibits thereto), prospectuses and
preliminary prospectuses in conformity with the requirements of the
Securities Act, in order to facilitate the public sale or other disposition
of all or any of the Merger Shares by the Company Shareholders; provided,
however, that the obligation of Parent to deliver copies of prospectuses or
preliminary prospectuses to the Company Shareholders shall be subject to
the receipt by Parent of reasonable assurances from the Company
Shareholders that the Company Shareholders will comply with the applicable
provisions of the Securities Act and of such other securities or blue sky
laws as may be applicable in connection with any use of such prospectuses
or preliminary prospectuses;
(e) file documents required of Parent for normal blue sky clearance in
states reasonably specified in writing by any Company Shareholder;
provided, however, that Parent shall not be required to qualify to do
business or consent to service of process in any jurisdiction in which it
is not now so qualified or has not so consented;
(f) file with the Nasdaq Stock Market, Inc. a Notification Form for
Listing of Additional Shares, if applicable, with respect to the Merger
Shares and pay all fees and expenses incurred in connection therewith;
(g) bear all expenses in connection with the procedures of this
Section 11.1 and the registration of the Securities pursuant to the
Registration Statement; and
(h) file the reports required to be filed by it under the Securities
Act and the Exchange Act and the rules and regulations adopted by the SEC
thereunder (or, if Parent is not required to file such reports, it
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will, during the Registration Period upon the request of any Company
Shareholder, timely make publicly available other information so long as
necessary to permit sales pursuant to Rule 144 and/or Rule 145 under the
Securities Act) and it will take such further action as any Company
Shareholder may reasonably request, all to the extent required from time to
time to enable the Company Shareholders to sell their respective Merger
Shares without registration under the Securities Act within the limitation
of the exemptions provided by (a) Rule 144 and/or Rule 145 under the
Securities Act, as such rules may be amended from time to time, or (b) any
similar rule or regulation hereafter adopted by the SEC. Upon the request
of a Company Shareholder, Parent shall deliver to such Company Shareholder
a written statement as to whether it has complied with such requirements.
11.2 TRANSFER OF SECURITIES AFTER REGISTRATION. The Company Shareholders
agree that they will not effect any disposition of the Merger Shares that would
constitute a sale within the meaning of the Securities Act in violation of the
Securities Act and that they will promptly notify Parent of any changes in the
information set forth in the Registration Statement regarding the Company
Shareholders as provided by the Company Shareholders in writing to Parent or
their plan of distribution.
11.3 INDEMNIFICATION.
(a) For the purposes of this Section 11.3, the term "Selling
Shareholders" shall mean the Company Shareholders who received Merger
Shares pursuant to the terms of this Agreement, and such Company
Shareholders' trustees, and each person who controls the Company
Shareholders within the meaning of the Securities Act;
(b) the term "Registration Statement" shall include any final
prospectus, exhibit, supplement or amendment included in or relating to the
Registration Statement referred to in Section 11.1; and
(c) the term "untrue statement" shall mean any untrue statement or
alleged untrue statement of a material fact contained in the Registration
Statement, or any omission or alleged omission to state in the Registration
Statement of a material fact required to be stated therein or necessary to
make the statements therein.
Parent agrees to indemnify and hold harmless, to the extent permitted by
law, each Selling Shareholder and each person, if any, who controls such Selling
Shareholders within the meaning of Section 15 of the Securities Act, from and
against any losses, claims, damages or liabilities to which such Selling
Shareholders may become subject (under the Securities Act or otherwise) insofar
as such losses, claims, damages or liabilities (including reasonable legal fees
and other expenses incurred in the investigation and defense thereof) arise out
of, or are based upon, any untrue statement or arise out of any failure by
Parent to fulfill any undertaking included in the Registration Statement or any
violation by Parent of any rule or regulation promulgated under the Securities
Act or any state securities laws applicable to Parent, and Parent will reimburse
such Selling Shareholder or controlling person for any reasonable legal or other
expenses reasonably incurred in investigating, defending or preparing to defend
any such action, proceeding or claim; provided, however, that Parent shall not
be liable in any such case to the extent that such loss, claim, damage or
liability arises out of, or is based upon, an untrue statement made in such
Registration Statement based upon written information furnished to Parent by or
on behalf of such Selling Shareholder or the Company, or the failure of such
Selling Shareholder to comply with the covenants and agreements contained in
Section 10.2 hereof respecting sale of the Merger Shares or any statement or
omission in any prospectus that is corrected in any subsequent prospectus that
was delivered to the Selling Shareholder prior to the written confirmation of
the pertinent sale or sales by the Selling Shareholder.
The Selling Shareholders agree to indemnify and hold harmless, to the
extent permitted by law, Parent (and each person, if any, who controls Parent
within the meaning of Section 15 of the Securities Act, each officer of Parent
who signs the Registration Statement and each director of Parent) from and
against any losses, claims, damages or liabilities to which Parent (or any such
officer, director or controlling person) may become subject (under the
Securities Act or otherwise), insofar as such losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) arise out of, or are
based upon, any failure to comply with the covenants and agreements contained in
Section 11.2 hereof respecting sale of the Merger Shares, or any
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untrue statement contained in a Registration Statement if such untrue statement
was made based upon written information furnished by or on behalf of the Selling
Shareholder, and the Selling Shareholder will reimburse Parent (or such officer,
director or controlling person), as the case may be, for any reasonable legal or
other expenses reasonably incurred in investigating, defending or preparing to
defend any such action, proceeding or claim. In no event shall the liability of
the Selling Shareholder hereunder be greater in amount than the dollar amount of
the proceeds received by the Selling Shareholder upon the sale of Merger Shares
giving rise to such indemnification obligation.
Promptly after receipt by any indemnified person of a notice of a claim or
the beginning of any action in respect of which indemnity is to be sought
against an indemnifying person pursuant to this Section 11.3, such indemnified
person shall notify the indemnifying person in writing of such claim or of the
commencement of such action, and, subject to the provisions hereinafter stated,
in case any such action shall be brought against an indemnified person and such
indemnifying person shall have been notified thereof, such indemnifying person
shall be entitled to participate therein, and, to the extent it shall wish, to
assume the defense thereof, with counsel reasonably satisfactory to such
indemnified person. After notice from the indemnifying person to such
indemnified person of its election to assume the defense thereof, such
indemnifying person shall not be liable to such indemnified person for any legal
expenses subsequently incurred by such indemnified person in connection with the
defense thereof; provided, however, that if there exists or shall exist a
conflict of interest that would make it inappropriate under applicable standards
of professional conduct, in the written opinion of counsel to the indemnified
person, for the same counsel to represent both the indemnified person and such
indemnifying person, the indemnified person shall be entitled to retain its own
counsel at the expense of such indemnifying person; provided, however, that no
indemnifying person shall be responsible for the fees and expenses of more than
one separate counsel for all indemnified parties. The failure of any indemnified
party to notify an indemnifying party of any claim against such indemnified
party in respect of which indemnity may be sought hereunder shall not relieve
the indemnifying party from any liability unless (and only to the extent) the
indemnifying party was prejudiced by such failure, and in no event shall such
failure relieve the indemnifying party from any other liability which it may
have to such indemnified party.
11.4 CONTRIBUTION. If the indemnification provided for in this Section 11
is unavailable to the indemnified parties in respect of any losses, claims,
damages, liabilities or judgments referred to herein, then each indemnifying
party, in lieu of indemnifying such indemnified party, shall contribute to the
amount paid or payable by such indemnified party as a result of such losses,
claims, damages, liabilities and judgments in such proproportion as to reflect
the relative fault of Parent on the one hand and each Selling Shareholder on the
other in connection with the statements, omissions or acts which resulted in
such losses, claims, damages, liabilities or judgments, as well as any other
relevant equitable considerations. The relative fault of Parent on the one hand
and of each Selling Shareholder on the other shall be determined by reference
to, among other things, the acts of Parent and of each Selling Shareholder that
gave rise to the losses, claims, damages, liabilities or judgments referred to
herein, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by such party, and the party's relative intent, knowledge, access to
information and opportunity to correct of fraudulent misrepresentation (within
the meaning of subsection 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation.
11.5 INFORMATION AVAILABLE. So long as the Registration Statement is
effective covering the resale of Merger Shares owned by the Selling
Shareholders, Parent will furnish to the Selling Shareholders who at such time
own in excess of 10% of Parent Common Stock outstanding:
(a) as soon as practicable after available (but, in the case of Parent's
Annual Report to Shareholders, within 120 days after the end of each fiscal year
of Parent), one copy of (i) its Annual Report to Shareholders (which Annual
Report shall contain financial statements audited in accordance with generally
accepted accounting principles by a national firm of certified public
accountants), (ii) its Annual Report on Form 10-K, (iii) its quarterly reports
on Form 10-Q, and (iv) a full copy of the particular Registration Statement
covering the Merger Shares (the foregoing, in each case, excluding exhibits);
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(b) upon the reasonable request of any Selling Shareholder, all exhibits
excluded by parenthetical to paragraph (a) of this Section 11.5; and
(c) upon the reasonable request of any Selling Shareholder, an adequate
number of copies of the prospectuses to supply to any other party requiring such
prospectuses.
11.6 SUCCESSORS AND ASSIGNS. The provisions of this Section 11 shall
inure to the benefit of, and be binding upon, any and all transferees of the
Merger Shares by any Selling Shareholder.
SECTION 12. MISCELLANEOUS PROVISIONS
12.1 FURTHER ASSURANCES. Each party hereto shall execute and cause to be
delivered to each other party hereto such instruments and other documents, and
shall take such other actions, as such other party may reasonably request (prior
to, at or after the Closing) for the purpose of carrying out or evidencing any
of the transactions contemplated by this Agreement.
12.2 ATTORNEYS' FEES. Subject to Section 9.3(a), if any action at law or
suit in equity to enforce this Agreement or the rights of any of the parties
hereunder is brought against any party hereto, the prevailing party shall be
entitled to recover reasonable attorneys' fees, costs and disbursements (in
addition to any other relief to which the prevailing party may be entitled).
12.3 NOTICES. Any notice or other communication required or permitted to
be delivered to any party under this Agreement shall be in writing to the
address or facsimile telephone number set forth beneath the name of such party
below (or to such other address or facsimile telephone number as such party
shall have specified in a written notice given to the other parties hereto):
if to Parent or Merger Sub:
IPL Systems, Inc.
124 Acton Street
Maynard, MA 01754
Attention: Chief Executive Officer
Facsimile: (508) 461-1321
with a copy to (which shall not constitute notice):
Palmer & Dodge LLP
One Beacon Street
Boston MA 02108-3190
Attention: Nathaniel S. Gardiner, Esq.
Facsimile: (617) 227-4420
if to the Company:
ANDATACO
10140 Mesa Rim Road
San Diego, CA 92121
Attention: W. David Sykes
Facsimile: (619) 453-2676
with a copy to (which shall not constitute notice):
Cooley Godward LLP
4365 Executive Drive, Suite 1100
San Diego, CA 92121
Attention: Jeremy D. Glaser, Esq.
Facsimile: (619) 453-3555
All such notices and other communications shall be deemed to have been received
(a) in the case of personal delivery, on the date of such delivery, (b) in the
case of a telecopy, when the party receiving such telecopy
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shall have confirmed receipt of the communication, (c) in the case of delivery
by nationally-recognized, overnight courier, on the business day following
dispatch and (d) in the case of mailing, on the fifth business day following
such mailing.
12.4 TIME OF THE ESSENCE. Time is of the essence of this Agreement.
12.5 GOVERNING LAW; VENUE.
(a) This Agreement shall be construed in accordance with, and governed
in all respects by, the internal laws of the State of California (without
giving effect to principles of conflicts of laws).
(b) Any legal action or other legal proceeding relating to this
Agreement or the enforcement of any provision of this Agreement may be
brought or otherwise commenced in any state or federal court located in San
Diego, California. Each party to this Agreement:
(i) expressly and irrevocably consents and submits to the
jurisdiction of each state and federal court located in San Diego,
California (and each appellate court located in the State of California)
in connection with any such legal proceeding;
(ii) agrees that each state and federal court located in California
shall be deemed to be a convenient forum; and
(iii) agrees not to assert (by way of motion, as a defense or
otherwise), in any such legal proceeding commenced in any state or
federal court located in California, any claim that such party is not
subject personally to the jurisdiction of such court, that such legal
proceeding has been brought in an inconvenient forum, that the venue of
such proceeding is improper or that this Agreement or the subject matter
of this Agreement may not be enforced in or by such court.
(c) Nothing contained in Section 12.5(b) shall be deemed to limit or
otherwise affect the right of any Person entitled to indemnification
hereunder to commence any legal proceeding or otherwise proceed against the
indemnifying party in any other forum or jurisdiction.
12.6 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and
shall be enforceable by and inure solely to the benefit of, the parties hereto
and their successors and assigns; provided, however, that this Agreement may not
be assigned by any party without the written consent of the other parties, and
any attempted assignment without such consent shall be void and of no effect.
None of the provisions of this Agreement are intended to provide any rights or
remedies to any Person other than the parties hereto and their respective
successors and assigns (if any).
12.7 REMEDIES CUMULATIVE; SPECIFIC PERFORMANCE. The rights and remedies
of the parties hereto shall be cumulative (and not alternative). The parties to
this Agreement agree that, in the event of any breach or threatened breach by
any party to this Agreement of any covenant, obligation or other provision set
forth in this Agreement for the benefit of any other party to this Agreement,
such other party shall be entitled (in addition to any other remedy that may be
available to it) to (a) a decree or order of specific performance or mandamus to
enforce the observance and performance of such covenant, obligation or other
provision, and (b) an injunction restraining such breach or threatened breach.
12.8 WAIVER.
(a) No failure on the part of any Person to exercise any power, right,
privilege or remedy under this Agreement, and no delay on the part of any
Person in exercising any power, right, privilege or remedy under this
Agreement, shall operate as a waiver of such power, right, privilege or
remedy; and no single or partial exercise of any such power, right,
privilege or remedy shall preclude any other or further exercise thereof or
of any other power, right, privilege or remedy.
(b) No Person shall be deemed to have waived any claim arising out of
this Agreement, or any power, right, privilege or remedy under this
Agreement, unless the waiver of such claim, power, right, privilege or
remedy is expressly set forth in a written instrument duly executed and
delivered on behalf of
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such Person; and any such waiver shall not be applicable or have any effect
except in the specific instance in which it is given.
12.9 AMENDMENTS. This Agreement may not be amended, modified, altered or
supplemented other than by means of a written instrument duly executed and
delivered on behalf of all of the parties hereto.
12.10 SEVERABILITY. In the event that any provision of this Agreement, or
the application of any such provision to any Person or set of circumstances,
shall be determined to be invalid, unlawful, void or unenforceable to any
extent, the remainder of this Agreement, and the application of such provision
to Persons or circumstances other than those as to which it is determined to be
invalid, unlawful, void or unenforceable, shall not be impaired or otherwise
affected and shall continue to be valid and enforceable to the fullest extent
permitted by law.
12.11 DISCLOSURE SCHEDULES. The disclosure schedules shall be arranged in
separate parts corresponding to the numbered and lettered sections contained in
Section 2 or in Section 3, as the case may be, and the information disclosed in
any numbered or lettered part shall be deemed to relate to and to qualify only
the particular representation and warranty set forth in the corresponding
numbered or lettered section in Section 2 or in Section 3, as the case may be,
and shall not be deemed to relate to or to qualify any other representation or
warranty.
12.12 ENTIRE AGREEMENT. This Agreement and the other agreements referred
to herein set forth the entire understanding of the parties hereto relating to
the subject matter hereof and, except for the Confidential Disclosure Agreement
dated as of October 8, 1996 between Parent and the Company (which shall continue
in full force and effect), supersede all prior and contemporaneous agreements
and understandings among or between any of the parties relating to the subject
matter hereof, including without limitation the LOI.
12.13 CONSTRUCTION.
(a) For purposes of this Agreement, whenever the context requires: the
singular number shall include the plural, and vice versa; the masculine
gender shall include the feminine and neuter genders; the feminine gender
shall include the masculine and neuter genders; and the neuter gender shall
include the masculine and feminine genders.
(b) The parties hereto agree that any rule of construction to the
effect that ambiguities are to be resolved against the drafting party shall
not be applied in the construction or interpretation of this Agreement.
(c) As used in this Agreement, the words "include" and "including,"
and variations thereof, shall not be deemed to be terms of limitation, but
rather shall be deemed to be followed by the words "without limitation."
(d) Except as otherwise indicated, all references in this Agreement to
"Sections" and "Exhibits" are intended to refer to Sections of this
Agreement and Exhibits to this Agreement.
12.14 HEADINGS. The bold-faced section headings contained in this
Agreement are for convenience of reference only, shall not be deemed to be a
part of this Agreement and shall not be referred to in connection with the
construction or interpretation of this Agreement.
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12.15 COUNTERPARTS. This Agreement may be executed in several
counterparts, each of which shall constitute an original and all of which, when
taken together, shall constitute one and the same instrument. The parties hereto
have caused this Agreement to be executed and delivered as of February 28, 1997.
IPL SYSTEMS, INC.,
a Massachusetts corporation
By: /s/ RONALD J. GELLERT
-------------------------------
Name: Ronald J. Gellert
Title: President and Chief
Executive Officer
IPL ACQUISITION CORP.,
a Delaware corporation
By: /s/ RONALD J. GELLERT
-------------------------------
Name: Ronald J. Gellert
Title: President and Chief
Executive Officer
ANDATACO,
a California corporation
By: /s/ W. DAVID SYKES
-------------------------------
Name: W. David Sykes
Title: President
/s/ W. DAVID SYKES
----------------------------------
W. DAVID SYKES
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SCHEDULE A
The following is a list of directors, executive officers and shareholders
of Parent who have executed and delivered to the Company irrevocable proxies to
vote all shares of voting stock held by such persons in favor of the approval of
this Agreement, the Merger and the transactions contemplated thereby. Such
irrevocable proxies have not been modified or revoked and are in full force and
effect:
Anita D. Buchanan
Ronald Gellert
William R. Hauptli
Stephen J. Ippolito
Cornelius P. McMullan
Harris Ravine
Eugene F. Tallone
<PAGE> 136
EXHIBIT A
CERTAIN DEFINITIONS
For purposes of the Agreement (including this Exhibit A):
Acquisition Proposal. "Acquisition Proposal" shall mean any offer or
proposal (other than an offer or proposal by Parent or the Company, as the case
may be) contemplating or otherwise relating to any Company Acquisition
Transaction or Parent Acquisition Transaction, as the case may be.
Affiliates. "Affiliates" shall mean any Person that directly, or
indirectly through one or more intermediaries, controls or is controlled by or
is under common control with, a specified Person.
Agreement. "Agreement" shall mean the Agreement and Plan of Merger and
Reorganization to which this Exhibit A is attached (including the Disclosure
Schedules), as it may be amended from time to time.
Agreement of Merger. "Agreement of Merger" shall have the meaning set
forth in Section 1.3.
AS/400 Assets. AS/400 Assets shall mean proprietary microcode technology,
customer end-user maintenance agreements and RAID tower inventory for sale,
which relate to International Business Machines AS/400 model computer systems.
CGCL. "CGCL" shall mean the California General Corporation Law.
Closing. "Closing" shall have the meaning set forth in Section 1.3.
Closing Date. "Closing Date" shall have the meaning set forth in Section
1.3.
Code. "Code" shall mean the Internal Revenue Code of 1968, as amended.
Company. "Company" shall mean ANDATACO, a California corporation.
Company Accounts Receivable. "Company Accounts Receivable" shall have the
meaning set forth in Section 2.7.
Company Acquisition Transaction. "Company Acquisition Transaction" shall
mean any transaction not contemplated by this Agreement involving:
(a) any sale, lease, exchange, transfer or other disposition of the
assets of the Company constituting more than 50% of the assets of the
Company or accounting for more than 50% of the revenues of the Company in
any one transaction or in a series of related transactions;
(b) any offer to purchase, tender offer, exchange offer or any similar
transaction or series of related transactions made by any Person involving
more than 50% of the outstanding shares of the capital stock of the
Company; or
(c) any merger, consolidation, business combination, share exchange,
reorganization or similar transaction or series of related transactions
involving the Company.
Company Common Stock. "Company Common Stock" shall mean all classes of
Company capital stock.
Company Contract. "Company Contract" shall mean any Contract: (a) to which
the Company is a party; (b) by which the Company or any of its assets is or may
become bound or under which the Company has, or may become subject to, any
obligation; or (c) under which the Company has or may acquire any right or
interest.
Company Disclosure Schedule. "Company Disclosure Schedule" shall have the
meaning set forth in the Preamble to Section 2.
Company Financial Statements. "Company Financial Statements" shall mean
those financial statements of the Company (including the footnotes thereto) set
forth in clauses (i) and (ii) of Section 2.4(a).
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Company Option. "Company Option" shall mean any option to purchase capital
stock of the Company held by any director, officer or employee of, or consultant
to, the Company.
Company Pension Plan. "Company Pension Plan" shall have the meaning set
forth in Section 2.15(c).
Company Plans. "Company Plans" shall have the meaning set forth in Section
2.15(b).
Company Proprietary Assets. "Company Proprietary Assets" shall mean any
Proprietary Asset owned by or licensed to the Company or otherwise used by the
Company.
Company Related Party. "Company Related Party" shall have the meaning set
forth in Section 2.18.
Company Returns. "Company Returns" shall have the meaning set forth in
Section 2.14.
Company Shareholders. "Company Shareholders" shall mean those holders of
Company Common Stock entitled to receive shares of Parent Common Stock pursuant
to Section 1.5.
Company Stock Certificate. "Company Stock Certificate" shall have the
meaning set forth in Section 1.6.
Company Warrant. "Company Warrant" shall mean any warrant option or other
right (excluding Company Options) granted by the Company to any Person to
purchase capital stock of the Company.
Company Welfare Plan. "Company Welfare Plan" shall have the meaning set
forth in Section 2.15(d).
Consent. "Consent" shall mean any approval, consent, ratification,
permission, waiver or authorization (including any Governmental Authorization).
Contract. "Contract" shall mean any written, oral or other agreement,
contract, subcontract, lease, understanding, instrument, note, warranty,
insurance policy, benefit plan, or legally binding commitment or undertaking of
any nature.
Damages. "Damages" shall include any loss, damage, injury, liability,
claim, demand, settlement, judgment, award, fine, penalty, Tax, fee (including
reasonable attorneys' fees), charge, cost (including costs of investigation) or
expense of any nature. Damages shall not include lost profits, lost savings, or
other indirect, special, incidental or consequential damages whether such
damages are based on tort, contract, or any other legal theory, and even if the
Indemnitee has been advised of the possibility of such damages.
DGCL. "DGCL" shall mean the Delaware General Corporation Law.
Effective Date. "Effective Date" shall have the meaning set forth in
Section 1.3.
Employee Benefit Plan. "Employee Benefit Plan" shall have the meaning
specified in Section 3(3) of ERISA.
Encumbrance. "Encumbrance" shall mean any lien, pledge, hypothecation,
charge, mortgage, security interest, encumbrance, claim, infringement,
interference, option, right of first refusal, preemptive right, community
property interest or restriction of any nature (including any restriction on the
voting of any security, any restriction on the transfer of any security or other
asset, any restriction on the receipt of any income derived from any asset, any
restriction on the use of any asset and any restriction on the possession,
exercise or transfer of any other attribute of ownership of any asset).
Entity. "Entity" shall mean any corporation (including any non-profit
corporation), general partnership, limited partnership, limited liability
partnership, joint venture, estate, trust, company, limited liability company,
joint stock company, firm or other enterprise, association, organization or
entity.
Environmental Law. "Environmental Law" shall have the meaning set forth in
Section 2.16.
ERISA. "ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended.
Escrow Agent. "Escrow Agent" shall be that person or entity appointed to
act as escrow agent for the Shareholder's Indemnity Shares pursuant to the
Escrow Agreement.
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Escrow Period. "Escrow Period" shall have the meaning set forth in Section
1.8(a).
Exchange Act. "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended.
Exchange Ratio. "Exchange Ratio" shall have the meaning set forth in
Section 1.5(b)(ii).
Expiration Date. "Expiration Date" shall have the meaning set forth in
Section 10.1.
Governmental Authorization. "Governmental Authorization" shall mean any:
(a) permit, license, certificate, franchise, permission, clearance,
registration, qualification or authorization issued, granted, given or otherwise
made available by or under the authority of any Governmental Body or pursuant to
any Legal Requirement; or (b) right under any Contract with any Governmental
Body.
Governmental Body. "Governmental Body" shall mean any: (a) nation, state,
commonwealth, province, territory, county, municipality, district or other
jurisdiction of any nature; (b) federal, state, local, municipal, foreign or
other government; or (c) governmental or quasi-governmental authority of any
nature (including any governmental division, department, agency, commission,
instrumentality, official, organization, unit, body or Entity and any court or
other tribunal).
Hsr Act. "HSR Act" shall mean the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended.
Indemnified Party. "Indemnified Party" shall have the meaning set forth in
Section 10.6.
Indemnifying Party. "Indemnifying Party" shall have the meaning set forth
in Section 10.6.
Issuance. "Issuance" shall have the meaning set forth in Section 11.1(a).
Legal Proceeding. "Legal Proceeding" shall mean any action, suit,
litigation, arbitration, proceeding (including any civil, criminal,
administrative, investigative or appellate proceeding), hearing, inquiry, audit,
examination or investigation commenced, brought, conducted or heard by or
before, or otherwise involving, any court or other Governmental Body or any
arbitrator or arbitration panel.
Legal Requirement. "Legal Requirement" shall mean any federal, state,
local, municipal, foreign or other law, statute, constitution, principle of
common law, resolution, ordinance, code, edict, decree, rule, regulation, ruling
or requirement issued, enacted, adopted, promulgated, implemented or otherwise
put into effect by or under the authority of any Governmental Body.
LOI. "LOI" shall mean that certain Letter of Intent dated February 10,
1997 by and among Parent, the Company and Shareholder.
Material Adverse Effect. A violation of a representation or warranty or
any other matter will be deemed to have a "Material Adverse Effect" on the
Company or Parent, as the case may be, if such violation or other matter
(considered together with all other matters that would constitute exceptions to
such representations and warranties set forth in the Agreement but for the
presence of "Material Adverse Effect" or other materiality qualifications, or
any similar qualifications, in such representations and warranties) would have a
material adverse effect on the Company's or, taken as a whole, Parent's and
Parent's Subsidiaries, as the case may be, business, condition, assets,
liabilities, operations, financial performance or prospects.
Material Company Contract. "Material Company Contract" shall have the
meaning set forth in Section 2.10(a).
Material Parent Contract. "Material Parent Contract" shall have the
meaning set forth in Section 3.10.
Materials of Environmental Concern. "Materials of Environmental Concern"
shall have the meaning set forth in Section 2.16.
Merger Shares. "Merger Shares" shall have the meaning set forth in Section
1.5(b).
Merger Sub. "Merger Sub" shall mean IPL Acquisition Corp., a Delaware
corporation.
Parent. "Parent" shall mean IPL Systems, Inc., a Massachusetts
corporation.
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Parent Accounts Receivable. "Parent Accounts Receivable" shall have the
meaning set forth in Section 3.7.
Parent Acquisition Transaction. "Parent Acquisition Transaction" shall
mean any transaction not contemplated by this Agreement involving:
(a) any sale, lease exchange, transfer or other disposition of the
assets of Parent or any subsidiary of Parent constituting more than 50% of
the consolidated assets of Parent or accounting for more than 50% of the
consolidated revenues of Parent in any one transaction or in a series of
related transactions.
(b) any offer to purchase, tender offer, exchange offer or any similar
transaction or series of related transactions made by any Person involving
more than 50% of the outstanding shares of the capital stock of Parent or
the filing of any Statement on Schedule 14D-1 with the SEC in connection
therewith.
(c) any merger, consolidation, business combination, share exchange,
reorganization or other similar transaction or series of related
transactions involving Parent.
Parent Common Stock. "Parent Common Stock" shall mean Parent's Class A
Common Stock, $0.01 par value per share.
Parent Disclosure Schedule. "Parent Disclosure Schedule" shall have the
meaning set forth in the Preamble to Section 3.
Parent Indemnity Shares. "Parent Indemnity Shares" shall have the meaning
set forth in Section 1.8(b).
Parent Pension Plan. "Parent Pension Plan" shall have the meaning set
forth in Section 3.15(d).
Parent Plans. "Parent Plans" shall have the meaning set forth in Section
3.15(b).
Parent Proprietary Assets. "Parent Proprietary Assets" shall mean any
Proprietary Assets owned by or licensed to, or otherwise used by, Parent or a
Parent Subsidiary.
Parent Related Party. "Parent Related Party" shall have the meaning set
forth in Section 3.18.
Parent Returns. "Parent Returns" shall have the meaning set forth in
Section 3.14.
Parent SEC Documents. "Parent SEC Documents" shall have the meaning set
forth in Section 3.3.
Parent Shareholders' Meeting. "Parent Shareholders' Meeting" shall have
the meaning set forth in Section 5.6(a).
Parent Subsidiaries. "Parent Subsidiaries" shall have the meaning set
forth in Section 3.1.
Parent Welfare Plan. "Parent Welfare Plan" shall have the meaning set
forth in Section 3.15(d).
Person. "Person" shall mean any individual, Entity or Governmental Body.
Pre-Closing Period. "Pre-Closing Period" shall have the meaning set forth
in Section 4.1.
Proprietary Asset. "Proprietary Asset" shall mean any: (a) patent, patent
application, trademark (whether registered or unregistered), trademark
application, trade name, fictitious business name, service mark (whether
registered or unregistered), service mark application, copyright (whether
registered or unregistered), copyright application, maskwork, maskwork
application, trade secret, know-how, customer list, franchise, system, computer
software, source code, computer program, invention, design, blueprint,
engineering drawing, proprietary product, technology, proprietary right or other
intellectual property right or intangible asset; or (b) right to use or exploit
any of the foregoing.
Registration Period. "Registration Period" shall have the meaning set
forth in Section 11.1(c).
Registration Statement. "Registration Statement" shall have the meaning
set forth in Section 11.1(a).
Representatives. "Representatives" shall mean officers, directors,
employees, agents, attorneys, accountants, advisors and representatives.
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Requisite Vote.
SEC. "SEC" shall mean the United States Securities and Exchange
Commission.
Securities Act. "Securities Act" shall mean the Securities Act of 1933, as
amended.
Selling Shareholders. "Selling Shareholders" shall have the meaning set
forth in Section 11.3(a).
Shareholder Debt. "Shareholder Debt" shall mean all outstanding
indebtedness of the Company owed to W. David Sykes including that certain
Promissory Note dated February 10, 1997 in the original principal amount of
$5,195,548.87.
Shareholders' Representative. "Shareholders' Representative" shall have
the meaning set forth in Section 1.8(a).
Superior Proposal. "Superior Proposal" shall have the meaning set forth in
Section 5.3(a).
Surviving Corporation. "Surviving Corporation" shall have the meaning set
forth in Section 1.1.
Taxes. "Taxes" shall mean any tax (including any income tax, franchise
tax, capital gains tax, gross receipts tax, value-added tax, surtax, excise tax,
ad valorem tax, transfer tax, stamp tax, sales tax, use tax, property tax,
business tax, withholding tax or payroll tax), levy, assessment, tariff, duty
(including any customs duty), deficiency or fee, and any related charge or
amount (including any fine, penalty or interest), imposed, assessed or collected
by or under the authority of any Governmental Body.
Tax Return. "Tax Return" shall mean any return (including any information
return), report, statement, declaration, estimate, schedule, notice,
notification, form, election, certificate or other document or information filed
with or submitted to, or required to be filed with or submitted to, any
Governmental Body in connection with the determination, assessment, collection
or payment of any Tax or in connection with the administration, implementation
or enforcement of or compliance with any Legal Requirement relating to any Tax.
Third Party Claim. "Third Party Claim" shall have the meaning set forth in
Section 10.6.
Triggering Event. A "Triggering Event" shall be deemed to have occurred
if: (i) the Board of Directors of Parent shall have failed to recommend, or
shall for any reason have withdrawn or shall have amended or modified in a
manner adverse to the Company its unanimous recommendation in favor of, the
Merger or approval or adoption of this Agreement; (ii) Parent shall have failed
to include in the Proxy Statement the unanimous recommendation of the Board of
Directors of Parent in favor of approval and adoption of this Agreement and the
Merger; (iii) the Board of Directors of Parent shall have approved, endorsed or
recommended any Acquisition Proposal; (iv) Parent shall have entered into any
letter of intent or similar document or any Contract relating to any Acquisition
Proposal; (v) Parent shall have failed to hold the Parent Shareholders' Meeting
as promptly as practicable and in any event within 45 days after the definitive
Proxy Statement was filed with the SEC; (vi) a tender or exchange offer relating
to securities of Parent shall have been commenced and Parent shall not have
published, sent or given to its securityholders, within ten (10) business days
after the commencement of such tender or exchange offer, a statement disclosing
that Parent recommends rejection of such tender or exchange offer; or (vii) an
Acquisition Proposal is publicly announced, and Parent (A) fails to issue a
press release announcing its opposition to such Acquisition Proposal within ten
(10) business days after such Acquisition Proposal is announced or (B) otherwise
fails to actively oppose such Acquisition Proposal.
Unaudited Interim Balance Sheet. "Unaudited Interim Balance Sheet" shall
have the meaning set forth in Section 2.4(a)(ii).
A-5
<PAGE> 141
ANNEX II
[LETTERHEAD OF NEEDHAM]
February 28, 1997
The Board of Directors
IPL Systems, Inc.
124 Acton Street
Maynard, MA 01754
Gentlemen:
We understand that IPL Systems, Inc. ("IPL Systems" or "the Company") and
ANDATACO ("ANDATACO" or "the Target") propose to enter into an Agreement and
Plan of Merger and Reorganization (the "Merger Agreement") pursuant to which
ANDATACO will become a wholly owned subsidiary of IPL Systems (the "Merger").
The term of the Merger will be set forth more fully in the Merger Agreement.
Pursuant to the proposed Merger Agreement, we understand that at the
Effective Date (as defined in the Merger Agreement), the shares of common stock
of ANDATACO deemed outstanding under the Merger Agreement will be converted into
the right to receive a number of shares (the "Conversion Ratio") of Common
Stock, par value $0.01 per share, of IPL Systems ("the Company's Common Stock")
determined by the following formula: [X/0.252)-X] where "X" is equal to (i) the
aggregate number of shares of the Company's Common Stock outstanding immediately
prior to the Effective Date, plus (ii) the total number of shares of the
Company's Common Stock subject to outstanding options, warrants or other rights
to acquire capital stock of IPL Systems or issuable pursuant to securities or
instruments convertible into or exchangeable for shares of the Company's capital
stock outstanding immediately prior to the Effective Date. On February 28, 1997,
"X", as indicated by the management of IPL Systems, is 6,276,219 yielding a
Conversion Ratio of approximately 2.97 shares issued to the shareholders of
ANDATACO for every 1 share of IPL Systems outstanding as defined above.
You have asked us to advise you as to the fairness, from a financial point
of view, to the shareholders of IPL Systems of the proposed consideration to be
paid by the Company to ANDATACO in the Merger. Needham & Company, Inc., as part
of its investment banking business, is regularly engaged in the valuation of
businesses and their securities in connection with mergers and acquisitions,
negotiated underwritings, secondary distributions of securities, private
placements and other purposes. We have acted as financial advisor of IPL Systems
in connection with the Merger and have received a fee for our services as
financial advisor, none of which is contingent on consummation of the Merger. In
addition, the Company has agreed to indemnify us for certain liabilities arising
from our role as financial advisor and out of the rendering of this opinion.
For purposes of this opinion, we have, among other things: (i) reviewed a
draft of the Merger Agreement dated February 27, 1997; (ii) reviewed certain
other documents related to the Merger; (iii) reviewed certain publicly available
information concerning IPL Systems and certain other relevant financial and
operating data of IPL Systems and ANDATACO made available from the internal
records of IPL Systems and ANDATACO; (iv) visited certain locations of
ANDATACO's facilities; (v) held discussions with members of senior management of
IPL Systems and ANDATACO concerning their current and future business prospects;
(vi) reviewed certain financial forecasts and projections prepared by IPL
Systems' and ANDATACO's respective managements; (vii) compared certain publicly
available financial data of certain companies whose securities are traded in the
public markets, which we deemed generally comparable to IPL Systems and
ANDATACO, to similar data for IPL Systems and ANDATACO; (viii) reviewed the
financial terms of certain other business combinations that we deemed generally
relevant; (ix) reviewed the multiples of financial and operating data paid by
acquirors in certain other business combinations that we deemed generally
relevant; (x) reviewed the impact of the Merger on IPL Systems' and ANDATACO's
projected operating results; (xi) reviewed current and historical market closing
prices and trading data for IPL Systems'
<PAGE> 142
Common Stock; and (xii) performed and/or considered such other studies,
analyses, inquiries and investigations as we deemed appropriate.
In connection with or review and in arriving at our opinion, we have not
assumed any responsibility to independently verify any of the foregoing
information, have relied on such information, and have assumed that all such
information is complete and accurate in all material respects. In addition, we
have assumed, with your consent, that (i) the Merger will be accounted for as a
purchase transaction for financial reporting purposes; (ii) any material
liabilities (contingent or otherwise, known or unknown) of IPL Systems and
ANDATACO are as set forth in the consolidated financial statements of IPL
Systems and ANDATACO, respectively; (iii) the terms set forth in the Merger
Agreement when executed will not differ materially from the proposed terms
provided to us in the draft Merger Agreement dated February 27, 1997; (iv) that
all conditions to the closing of the Merger will be satisfied without waiver;
and (v) the Merger will be consummated on a timely basis in the manner
contemplated in the Merger Agreement. With respect to IPL Systems' and
ANDATACO's financial forecasts provided to us by their respective managements,
we have assumed for purposes of our opinion that such forecasts have been
reasonably prepared on bases reflecting the best currently available estimates
and judgments of such managements, at the time of preparation, of the future
operating and financial performance of IPL Systems and ANDATACO. We have not
assumed any responsibility for or made or obtained an independent evaluation,
appraisal or physical inspection of the assets or liabilities of IPL Systems and
ANDATACO. Further, our opinion is based on economic, monetary and market
conditions existing as of the date hereof, and in rendering this opinion, we
have relied without independent verification which was either publicly available
or furnished to us by IPL Systems and ANDATACO. Our opinion as expressed herein
is limited to the fairness, from a financial point of view, to the shareholders
of IPL Systems of the consideration to be paid by IPL Systems to the
shareholders of ANDATACO in the Merger and does not address IPL Systems'
underlying business decision to engage in the Merger. Our opinion does not
constitute a recommendation to any shareholder of IPL Systems as to how such
shareholder should vote on the proposed Merger.
We are not expressing any opinion as to what the value of IPL Systems'
Common Stock will be when issued pursuant to the Merger or the price at which
IPL System's Common Stock will trade at any time.
In the ordinary course of our business, we may actively trade the equity
securities of IPL System for our own account and for the accounts of customers
and , accordingly, may at any time hold a long or short position in such
securities.
This letter and the opinion expressed herein are provided at the request
and for the information of the Board of Directors of IPL Systems and may not be
quoted or referred to or used for any other purpose without our prior written
consent, except that this letter may be disclosed in connection with any
registration statement or proxy statement used in connection with the Merger so
long as this letter is quoted in full in such registration statement or proxy
statement.
Based upon and subject to the foregoing, it is our opinion that, as of the
date hereof, the consideration to be paid by IPL Systems to the shareholders of
ANDATACO in the Merger is fair to the shareholders of IPL Systems from a
financial point of view.
Very truly yours,
/S/ NEEDHAM & COMPANY, INC.
<PAGE> 143
ANNEX III
IPL SYSTEMS, INC.
1996 ANNUAL REPORT TO STOCKHOLDERS
<PAGE> 144
PART I
ITEM 1. BUSINESS
GENERAL
IPL Systems, Inc. ("IPL" or the "Company") provides open-architecture
storage solutions for Hewlett Packard, Sun Microsystems, DEC Alpha, and IBM
RS/6000 and AS/400 Business servers, as well as Novell NetWare and Windows NT
environments. IPL design, manufactures, services and sells its products through
direct, indirect and OEM sales and service channels worldwide.
IPL has entered into an Agreement and Plan of Merger and Reorganization
(the "Merger Agreement"), dated as of February 28, 1997, among IPL, IPL
Acquisition Corp. ("Merger Sub"), a Delaware corporation and a wholly-owned
subsidiary of IPL, ANDATACO ("ANDATACO"), a California corporation, and W. David
Sykes, the controlling shareholder of ANDATACO providing for the merger (the
"Merger") of Merger Sub with and into ANDATACO. The Merger would result in
former holders of ANDATACO equity (including options, warrants and other rights
to acquire ANDATACO Common Stock, $1.00 par value per share) owning 74.8% of the
post-merger IPL Stock on a fully diluted basis. It is anticipated that approval
of matters related to the Merger will be submitted to the shareholders of IPL
and, if approved, will be consummated in the second quarter of 1997. In addition
to approval by the Company's shareholders, the Merger Agreement is subject to
several conditions, including those concerning the accuracy of the Company's
representations and warranties, the performance by the Company of certain
covenants, the agreement by a member of the Company's board of directors to
serve as Chief Executive Officer of ANDATACO following the Merger and the
expiration or early termination of the waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. There can be
no assurance that these or any other conditions to the Merger will be satisfied
or that the Merger will be consummated. For additional information regarding the
terms of the Merger and the Merger Agreement, see the Company's Current Report
on Form 8-K filed on March 25, 1997.
IPL was incorporated in Massachusetts on January 15, 1973. The Company's
principal office is located at 124 Acton Street, Maynard, Massachusetts 01754,
and its telephone number at that address is (508) 461-1000.
The discussion contained in this section as well as elsewhere in this
report may contain forward-looking statements based on the current expectations
of the Company's management. Such statements are subject to certain risks and
uncertainties which could cause actual results to differ materially from those
projected. See "Important Factors Regarding Forward-Looking Statements of IPL
Systems, Inc." attached hereto as Exhibit 99.1 and incorporated by reference
into this report. Readers are cautioned not to place undue reliance on these
forward-looking statements which speak only as of the date hereof. The Company
undertakes no obligation to publicly release the result of any revisions to
these forward-looking statements which may be made to reflect events or
circumstances occurring after the date hereof or to reflect the occurrence of
unanticipated events. See Exhibit 99.1.
RECENT DEVELOPMENT OF BUSINESS
In 1996, IPL's strategy was to continue its focus on the large and growing
market for open systems storage. The Company's DataBase RAID (Redundant Array of
Independent Disks) architecture provides data management solutions for users of
large relational databases (such as Oracle, Sybase and Informix). Several
factors during 1996 adversely affected the Company's ability to fully exploit
the potential of its products in the market. These factors included the
inability to market and sell the Company products effectively, which resulted in
part from the departure of certain key sales personnel, and the delayed
introduction of certain strategic technology.
PRODUCT DEVELOPMENT
The Company's product development strategy is to identify opportunities for
new storage solutions for the open systems Very Large Database ("VLDB") market.
Typically, the Company will identify new devices available from third parties
which may bring significant benefits to users of IPL's targeted computer
platforms. The Company then adapts or develops its proprietary controllers to
provide an interface between these devices
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<PAGE> 145
and the host computer without requiring changes to the host's hardware or
software. This approach is intended to decrease development costs, accelerate
new product development cycles and enable the Company to be early to market with
its storage offerings. See "Research and Development" below.
In the fourth quarter of 1996, the Company introduced dual active
controller arrays for the open systems storage market. RAIDTower II's dual
controllers handle data simultaneously (active-active), as opposed to most
implementations in which one controller is active while the other sits idle
(active-passive), waiting for the other controller to fail. RAIDTower II's dual
active controllers accelerate performance because of multiple data paths from
the host IOPs. The protection of dual controller redundancy, combined with fast
performance, may make RAIDTower II an attractive solution for VLDB users whose
business operations demand high performance and high availability of critical
information. IPL expects that the product's success in the market will depend
upon customer demand for active-active solutions and its ability to expand sales
channels in the U.S.
MARKETS
Industry analysts from the International Data Corporation ("IDC") project
that the multi-billion dollar open systems storage market will continue to grow
for the next several years, at the rate of 20-30% annually. IPL's target
customer in this environment is the VLDB user whose storage needs range from
20-30 gigabytes to multiple terabytes of data. Typically, this data is
distributed across multiple servers in data warehouse and on-line transaction
processing ("OLTP") applications in which data must be available at all times,
and data loss is unacceptable. IPL products are designed to address the
requirements of these environments.
During 1996, the Company concentrated primarily on UNIX platforms
(including Hewlett Packard and Sun business servers), and added windows NT
connectivity during the course of the year. UNIX is expected to continue as the
primary market in 1997.
SALES AND DISTRIBUTION
During 1996, IPL generated $17.1 million in revenue. Over 85% of such
revenue was produced from product sales; service revenue accounted for the
remainder. In 1996, IPL's revenue from product sales were generated as follows:
$8.0 million, or 47% of total revenue, from direct sales; $6.8 million, or 40%
of total revenue, from sales under OEM and other distributor agreements.
The Company's new focus on open systems required adjustment in 1996 to the
direct sales force in North America, including some restaffing and significant
training of IPL personnel to support users in UNIX multi-server environments. By
the end of 1996, the 15 member sales team in North America consisted of 9 sales
representatives, 3 inside sales staff supporting the field, and 3 field
engineers.
In connection with the Merger Agreement, IPL engaged ANDATACO as a
non-exclusive worldwide reseller of IPL's products pursuant to an OEM Agreement
dated as of February 25, 1997. Shortly thereafter, IPL discontinued direct
sales, which included the termination of its direct sales force. The Company now
relies almost exclusively on ANDATACO as the primary distributor of its
products. ANDATACO has hired many of the prior IPL employees, as well as certain
representatives who had previously left IPL to work with other companies. The
OEM Agreement can be terminated by either party on thirty day's notice. If the
OEM Agreement is terminated, there can be no assurance that the Company will be
able to access alternative distribution channels and may, therefore, confront
significant difficulties marketing its products. There also can be no assurance
that the Company's OEM arrangement with ANDATACO will ultimately prove
successful.
In addition to its existing agreements with its STARs in the U.S., during
1996, the Company continued to market its technology, on a limited basis,
through independent non-exclusive distributors worldwide. In Europe, these
distributors included Decision Systems International (DSI), an affiliate of
Ing.C.Olivetti & C.,S.p.A. ("Olivetti"), and GUWA Computer Systems. In Asia,
these distributors included Kanamatsu Electric LTD (KEL). Sales to Olivetti
accounted for more than 10% of IPL's total 1996 revenue. The Company's
international distributors remained focused on the IBM AS/400 market during
1996. While some overseas customers are beginning to move toward open systems
technology, the pace of adoption overseas is
2
<PAGE> 146
still expected to lag behind the U.S. The Company is not currently attempting to
engage new distributors and is relying primarily on its relationship with
ANDATACO for growth. The Company expects that its relationship with ANDATACO may
improve sales; however there can be no assurance of such improvement or, if its
relationship with ANDATACO is unsuccessful or only moderately successful, that
the Company could expand sales through other distributors. Overall, the Company
continues to have difficulty penetrating markets, both in the U.S. and abroad,
and no assurance can be given that the Company's efforts, including the
transition out of direct sales, will be able to reverse this trend.
Consistent with industry practice, the Company provides its distributors
with discounts from IPL list prices, which are based on a number of factors,
including the nature and volume of the distributor's business and its sales
territory. Generally, IPL's agreements with its distributors establish
territories and pricing and may be canceled on short notice and/or contain no
firm purchase commitments.
All of the Company's sales in 1996 were in U.S. dollars. For additional
information regarding the Company's export sales, see Note 11 of the Notes to
Consolidated Financial Statements contained elsewhere in this report.
BACKLOG
The Company believes that sales backlog is generally not material to its
business because the Company usually ships products within 30 days from receipt
of orders.
MANUFACTURING AND SUPPLIERS
Manufacture of the Company's disk drive sub-systems and tape drive systems
involves the assembly of purchased electro/mechanical components, custom-made
printed circuit boards fabricated in accordance with the Company's proprietary
designs, storage devices, standard integrated circuits and power supplies. All
products manufactured by IPL in this manner are then tested in the Company's
quality assurance program.
The Company has and will continue to rely on outside vendors to manufacture
certain electronic components and subassemblies used in the production of the
Company's products. Certain components, subassemblies, materials and equipment
necessary for the manufacture of the Company's products are obtained from a sole
supplier or a limited group of suppliers. The Company's reliance on sole
suppliers or a limited group of suppliers involves several risks, including a
potential inability to obtain an adequate supply of required products and
reduced control over the price, timely delivery, reliability and quality of
finished products. The Company does not have any long-term supply agreements
with its suppliers. Certain of the Company's suppliers have relatively limited
financial and other resources. Any inability to obtain timely deliveries of
products and services having acceptable qualities, or any other circumstance
that could require the Company to seek alternative sources of supply or to
manufacture its own electronic components, subassemblies and manufacturing
equipment internally, could delay the Company's ability to ship its products.
Any such delay could damage relationships with customers and could have a
material adverse effect on the Company's business and operating results.
COMPETITION
The computer data storage industry is intensely competitive and is
characterized by rapid technological change and constant pricing pressure. IPL
competes with a number of companies offering computer data storage, backup and
recovery systems. In the open systems storage market, EMC , Data General
Corporation, server systems manufacturers and resellers of servers are the major
competitors, but the Company believes that to date no dominant suppliers have
emerged in the very large database segment of the open systems storage market.
Because IPL's systems have to be compatible with the systems of the principal
manufacturers of UNIX-based open systems computers and the relational database
software programs, IPL's competitive position and operating results may be
adversely affected by, among other factors, modifications in the design of such
systems or programs, the introduction of new products by such manufacturers or
other competitors, reductions in the pricing of storage solutions in these
markets, or the implementation of new marketing strategies by any of its
principal competitors.
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<PAGE> 147
Today IPL focuses less on the AS/400 market than in prior years, but
continues to support its AS/400 customers. In this market, competitors include
International Business Machines ("IBM") and others. In both the UNIX and AS/400
markets, the company's competitors may have substantially greater financial,
product development marketing distribution resources than the Company.
There are several elements of competition in the market for computer
storage solutions. Principal among them are product quality and reliability,
time to market, price/performance characteristics, service and support,
marketing and distribution capability and the ability to deliver products in
large volumes. IPL believes that it competes favorably with respect to these
elements, except for marketing and distribution capabilities.
PRODUCT WARRANTY AND SERVICE
Disk and tape drive products have a warranty that covers defective material
and workmanship during the warranty period. Installation and maintenance service
is available to customers through various service providers, including Olivetti
North America, a U.S. affiliate of Olivetti, and DecisionOne. Certain of the
Company's major distributors also provide similar services. Technical support
for these services is provided from the Company's Maynard, Massachusetts, and
Brussels, Belgium offices.
RESEARCH AND DEVELOPMENT
IPL's ability to compete successfully depends upon the identification and
development of new storage, backup, and recovery solutions for the open systems
market. To achieve this goal, the Company's engineering group continuously
monitors hardware and software product development.
With the Company's focus on integrated hardware and software solutions, IPL
has developed software to further enhance its storage products. This software
includes the Centralized Management Systems ("CMS"), which monitors, tunes and
services IPL storage in local and distributed environments, and the software
component in ParellelBACK. Continued research and development in software is
intended to enhance ease of use, maintenance, and functionality of the Company's
storage solutions.
With respect to hardware, IPL will often evaluate and test a major
component that becomes available in the market, and subject it to IPL's own
reliability testing procedures to enable IPL to select the best available
products with adaptive potential for its markets. Once such a component has been
identified and qualified under IPL's reliability testing procedures, IPL then
applies its knowledge of host systems to adapt one of its proprietary
controllers or develop a new controller to provide an interface between the
peripheral storage device and the identified host computer. To facilitate this
process, IPL has designed standard controllers for several of the existing
peripheral interfaces.
To the extent that IPL is able to use its proprietary controllers for new
subsystems, the Company has been able to develop new products quickly at low
expense. However, because the computer industry is subject to rapid
technological development, there can be no assurance that IPL will be able to
respond in an effective or timely fashion to such changes. Historically, IPL has
been able to respond to technological changes introduced to the AS/400 market.
In 1996, the Company responded to demand in the open systems market for new dual
controller technology by introducing the RAIDTower II. To date, IPL remains one
of a limited number of manufacturers delivering dual (active-active) controller
subsystems. Despite this early introduction, however, the Company has had
limited initial success in marketing this product. The Company expects, subject
to the risk factors mentioned herein, that this ability to respond should
continue with manufacturers in the open systems business for which the Company
currently develops storage and backup technology. These manufacturers include
Hewlett Packard, Sun Microsystems and others.
During its fiscal year ended December 31, 1996, the Company incurred costs
of $1,439,000 for engineering and product development, compared to $1,317,000 in
1995 and $1,784,000 in 1994. The Company's research and development efforts
continue to focus on new products that utilize the Company's engineering
expertise in the design of storage products.
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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 the
ParallelBACK product and another product introduced in 1996. The status of
patents involves complex legal and factual questions and the breadth of claims
allowed is uncertain. There can be no assurance as to the likelihood that
pending patents will be issued or that any such patents will afford protection
against competitors with similar technology. In addition, patent applications
filed in foreign countries may provide significantly less patent protection than
the United States. No assurances can be given that patents issued to the Company
will not be infringed upon or designed around by others.
Due to the rapid technological development of the computer data storage
industry with concurrent extensive patent coverage and with the rapid rate of
issuance of new patents, certain aspects of the Company's products may infringe
patents unknown to the Company. Patent protection may also be obtained in the
future on new inventions and designs for peripheral storage subsystems or the
computers to which the Company's subsystems attach. Although the Company
believes that its products and other proprietary rights do not infringe the
proprietary rights of third parties, there can be no assurance that other third
parties will not assert infringement claims against the Company or that such
claims will not be successful. If any infringement exists or any such patents
are issued, the Company would seek, based upon industry practice, licenses to
such patents, but there can be no assurance that the Company will be able to
obtain any such licenses on terms which would not have a material adverse effect
on its business.
The Company also relies on unpatented proprietary technology, and there can
be no assurance that others may not independently develop the same or similar
technology or otherwise obtain access to the Company's proprietary technology.
To protect its rights in these areas, the Company requires all employees to
enter into confidentiality agreements. There can be no assurance that these
agreements will provide meaningful protection for the Company's trade secrets,
know-how or other proprietary information in the event of any unauthorized use,
misappropriation or disclosure of such trade secrets, know-how or other
proprietary information. If the Company is unable to maintain the proprietary
nature of its technologies, the Company's business could be adversely affected.
REGULATORY APPROVALS
All of the Company's current and proposed products have to comply with and
have regulatory or independent laboratory approval based on emissions and safety
standards for computing equipment. Delays in complying with such standards or in
obtaining any such approvals could delay introductions of new products.
International sales are subject to compliance with laws of various
countries, import/export restrictions and tariff regulations. While IPL is aware
that it may be subject to export restrictions with respect to certain countries,
it has not experienced difficulty in obtaining export licenses from the United
States Department of Commerce for sales into countries where it presently sells.
EMPLOYEES
On March 18, 1997, the Company had 61 full-time employees. The Company
believes it has a satisfactory relationship with its employees. The success of
the Company's operations depends, in part, on the Company's ability to attract
and retain experienced technical, sales, marketing and management personnel.
Such experienced personnel are in great demand and the Company must compete for
their services. None of the Company's employees is covered by a collective
bargaining agreement.
ITEM 2. PROPERTIES.
The Company currently occupies approximately 59,000 square feet of leased
office and manufacturing space worldwide, with an average annualized rental
cost, net of sub-lease/income, of approximately $370,000 for 1996. Since April
1995, the Company's lease of its facility located in Maynard Massachusetts
covers 123,700 square feet of office and manufacturing space for a term
extending through March 31, 1998. During
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1995, the Company consolidated its activities into approximately 42,000 square
feet in the Maynard facility and has offered the remaining space for sublease
(See Notes 6 and 12 of Notes to the Consolidated Financial Statements). In March
1996 the Company subleased an additional 36,700 square feet of its Maynard
facility for a term commensurate with the prime lease. In February 1997 the
Company subleased an additional 5,425 feet of its Maynard facility with options
for a term commensurate with the prime lease. In support of its direct sales
program, the Company had 9 regional offices which generally consisted of not
more than approximately 1,000 square feet, made available to the Company under
occupancy and service agreements with terms ranging between twelve and
thirty-six months all of which are expected to be terminated within months in
connection with the Company's transition out of Direct Sales in the U.S.
ITEM 3. LEGAL PROCEEDINGS.
There are no legal proceedings to which the Company is a party, other than
routine litigation incidental to the business, none of which is believed to be
material.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of the Company's security holders during
the quarter ended December 31, 1996.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS.
The Company's Class A Common Stock is traded on the Nasdaq Stock Market
system under the symbol IPLS. The following table reflects, for the period
indicated, the high and low sales prices for the Class A Common Stock as
reported by Nasdaq.
<TABLE>
<CAPTION>
PRICE
----------------
YEAR HIGH LOW
- ---- ---- ---
<C> <S> <C> <C>
1996 First Quarter 5 7/8 2 1/2
Second Quarter 8 1/4 3 1/2
Third Quarter 4 1/4 1 7/8
Fourth Quarter 2 1/2 1 1/4
YEAR
1995 First Quarter 5 1/2 2
Second Quarter 6 3/4 3 5/8
Third Quarter 7 7/8 5 3/8
Fourth Quarter 65/16 2 3/4
</TABLE>
On March 12, 1997 the last sale price of the Company's Class A Common Stock
was $2.313, and there were approximately 280 record holders and more than 2400
beneficial holders of the Company's Class A Common Stock.
The Company has never paid a cash dividend on its Class A Common Stock and
it is currently anticipated that cash dividends will not be paid to holders of
Class A Common Stock in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA.
FIVE-YEAR FINANCIAL SUMMARY
DOLLARS IN THOUSANDS (EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Revenues......................... $ 17,064 $ 24,764 $ 29,949 $ 39,721 $ 53,572
Net income (loss)................ $ (2,142) $ (3,464) $ (15,046) $ (2,451) $ 3,053
Net income (loss) per share...... $ (0.38) $ (0.63) $ (2.80) $ (0.47) $ 0.56
Weighted average common shares
outstanding.................... 5,617,926 5,469,177 5,381,519 5,235,964 5,435,649
Working capital.................. $ 4,921 $ 6,195 $ 8,285 $ 21,549 $ 25,935
Total assets..................... $ 10,614 $ 13,742 $ 18,764 $ 37,757 $ 39,355
Long-term debt................... $ -- $ -- $ -- $ -- $ --
Shareholder's equity............. $ 6,550 $ 8,543 $ 11,352 $ 26,398 $ 28,399
Current ratio.................... 2.2:1 2.2:1 2.1:1 2.9:1 3.4:1
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
The discussion contained in this item may contain forward-looking
statements based on the current expectations of the Company's management. Such
statements are subject to certain risks and uncertainties which would cause
actual results to differ materially from those projected. See "Important Factors
Regarding Forward-Looking Statements of IPL Systems, Inc." Filed as Exhibit 99.1
to this report which is incorporated by reference into this report . Readers are
cautioned not to place undue reliance on these forward-looking statements which
speak only as of the date hereof. The Company undertakes no obligation to
publicly release the result of any revisions to these forward-looking statements
which may be made to reflect events or circumstances occurring after the date
hereof or to reflect the occurrence of unanticipated events.
7
<PAGE> 151
The Company and ANDATACO entered into a definitive agreement dated as of
February 28, 1997 to merge the two companies. See Item 1, "Business - General"
above. IPL management believes that a successful merger would allow the Company
to obtain greater penetration into the rapidly expanding open systems storage
market and provide a broader revenue base to enable the Company access to
additional capital resources and reduction in overhead costs as a percentage of
revenues. In the absence of such a merger, management believes, based on its
cash flow estimates, that overhead cost burdens could be reduced in order to
provide a break-even cash flow and permit the Company's continuance as a going
concern only if recent revenue levels increased. Absent the Merger or an
alternative third-party channel of distribution, through ANDATACO or otherwise,
management does not believe that the Company will be able to achieve any such
increase in revenue.
The Company's net loss for 1996 was $2,142,000, or $0.38 per share,
compared with a net loss of $3,464,000, or $0.63 per share in 1995. The lower
net loss in 1996 resulted from higher gross margins from the sale of open
systems products, as well as reduced expenses. The Company has experienced
increased expenses in 1997 in connection with the Merger Agreement. The Company
has discontinued direct sales. In the foreseeable future, the Company intends to
sell almost exclusively pursuant to arrangements with ANDATACO. See Item 1
above. The pace of early sales under the Company's new marketing approach have
been disappointing and there can be no assurance that sales will ultimately
improve. Furthermore, the Company's reliance on one primary distributor is
inherently risky.
RESULTS OF OPERATIONS 1996 COMPARED WITH 1995
Revenues in 1996 were $17,064,000 compared with $24,764,000 in 1995. This
31% decrease in revenue compared to a year ago is the result of several factors,
including continued competitive pressures; changes in the business priorities of
the Company's major European distributors; the departure of several U.S. sales
representatives employed by IPL and the delay in releasing certain strategic new
technology. Total open systems products sales grew from 26% of total product
revenue in 1995 to 54% in 1996. Total U.S. sales were 73% and international
sales were 27% in 1996 compared with 66% and 34%, respectively, for 1995. Disk
revenue was 75% of total revenue in 1996 and 77% in 1995 respectively.
Gross margins were 44% in 1996 compared with 38% in 1995. The improvement
is the result of reduced costs, increased gross margins on U.S. open systems
product sales, and higher extended warranty revenues as well as partial
recoveries of a doubtful accounts receivable that was reserved in an earlier
period which totalled $1,550,000 in 1996 and $1,767,000 in 1995. Selling,
general and administrative expenses decreased approximately 26% to $8,501,000 in
1996 compared with $11,436,000 in 1995. This $2,935,000 decrease is primarily
due to IPL employing fewer sales representatives and ongoing expense control as
well as the reduction in revenue.
Engineering and development expenses were $1,439,000 in 1996 compared with
$1,317,000 in 1995. These additional expenses permitted the Company to develop
new storage backup and disaster recovery solutions for the database segment of
the UNIX market. On October 3, 1996, the Company announced the RAIDTower II
storage system with dual active technology.
Restructuring expenses were increased $497,000 in 1995 to cover the entire
occupancy cost for unused space for the balance of the lease term of the
Company's Maynard facility. In 1994, the Company recorded a $1,971,000
restructuring charge in connection with substantially reducing the scale of its
operations, and refocused on product development and sales efforts on the open
systems market.
The 1994 restructuring expense was reduced by $100,000 in the first quarter
of 1996, when the Company sublet a portion of the unused space in its Maynard
facility. The occupancy cost associated with this space had been previously
expensed in the third quarter of 1995 when restructuring expenses increased
$497,000 to cover the entire occupancy cost for unused space for the balance of
the lease term of the Company's Maynard facility. In the fourth quarter of 1994,
the Company had recorded a $1,971,000 restructuring charge when it had reduced
the scale of its operation and refocused on product development and sales
efforts in the open systems market.
8
<PAGE> 152
Other income decreased to $123,000 in 1996 from $274,000 in 1995 primarily
due to lower average cash balances during 1996.
The Company had no federal tax liability in 1996. The Company fully
utilized its benefit from the net operating loss carryback in 1994. There are
approximately $14,000,000 of federal and $26,000,000 of state tax loss
carryforwards available through 2011 and 2001, respectively. The Company's
ability to use these losses will be subject to certain annual limitations as a
result of the change in control if the proposed Merger is consummated. See Note
5 to the Notes to Consolidated Financial Statements. In 1996 the Company had a
net loss of $2,142,000, or $ 0.38 per share, compared with the 1995 net loss of
$3,464,000, or $0.63 per share.
1995 Compared with 1994
In 1995, the Company's revenues were $24,764,000 compared to $29,949,000 in
1994. This decline was primarily due to a significant reduction in purchases
made by the Company's European distributors who have been slow to transition to
the open systems technology. Continued competitive pressures and changes in the
business priorities of the Company's major European distributors contributed to
the decline in European sales. U.S. and non-European revenues were approximately
the same for 1995 and 1994. Open systems product sales represented 26% of total
product revenue in 1995 compared to 2% in 1994. Disk revenue was 77% of total
revenue in 1995 and 75% in 1994.
Gross margins were 38% in 1995 compared with 10% in 1994. The increase in
margins of approximately 280% was due to reduced costs, the transition from the
AS/400 market to the open systems market, and a partial recovery of a doubtful
accounts receivable in 1995 which had been fully reserved in 1994. The 1994
gross margin was reduced by $4,600,000 relating to provisions for bad debts and
excess and obsolete inventory reserves.
Selling, general and administrative expenses decreased approximately 27% in
1995 from 1994. This was primarily due to reengineering of the Company's
operations and ongoing expense control.
Engineering and development expenses decreased approximately 26% in 1995
compared with 1994 as a result of lower costs associated with the development of
open systems products.
Total other income decreased from $274,000 in 1995 to $288,000 in 1994
primarily due to lower average cash balance during 1995.
There was no federal tax liability in 1995. The Company fully utilized its
benefit from the net operating loss carryback in 1994. The effective tax benefit
rate in 1994 was 7.2%
In 1995 the Company had a net loss of $3,464,000 or $0.63 per share,
compared with the 1994 net loss of $15,046,000 or $2.80 per share.
Liquidity and Capital Resources
The Company's cash and equivalents as of December 31, 1996 were $2,274,000
compared with $3,595,000 at December 31, 1995. Accounts receivable decreased 41%
from $4,019,000 at December 31, 1995 to $2,391,000 at December 31, 1996. This
decrease was the result of the reduction in revenue. Inventories increased 15%
to $3,891,000 at December 31, 1996 from $3,375,000 at December 31, 1995, due
primarily to the new RAIDTower II product and also maintaining RAIDTower I
product in anticipation of higher revenue in the fourth quarter of 1996.
Accounts payable and accrued expenses decreased $1,135,000 primarily due to
reduced purchasing requirements and operating expenses.
As of December 31, 1996, IPL had working capital of $4,921,000, a decrease
of $1,274,000, or approximately 21%, from $6,195,000 as of December 31, 1995.
IPL's current ratio remained stable at about 2.2:1 as of the end of both years.
In the year ended December 31, 1996, IPL used $1,159,000 in cash to fund the
losses of its operating activities. If IPL's operating activities continue to
generate losses and use IPL's remaining cash, IPL will need to either liquidate
assets or seek outside sources of financing, which, if available at all, may not
be available on reasonable terms. IPL's management does not anticipate any such
needs if both (i) its OEM Agreement with ANDATACO produces cash receipts
anticipated by Company management
9
<PAGE> 153
and (ii) the Merger is consummated by the end of May. If the Merger is delayed
or terminated or if projected cash receipts from the arrangements with ANDATACO
are less than management projects, IPL will need to attempt to access outside
sources of capital. There can be no assurance, however, that such outside
sources of capital will be available.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See ITEM 14.
QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized unaudited quarterly financial data for 1995 and 1994 (dollars in
thousands, except per share amounts) is as follows:
<TABLE>
<CAPTION>
1996 -- THREE MONTHS ENDED MARCH 31 JUNE 30 SEPT. 30 DEC. 31
- --------------------------------------------------------- -------- ------- -------- -------
<S> <C> <C> <C> <C>
Revenue.................................................. $7,101 $ 4,464 $3,077 $ 2,422
Net income (loss)........................................ 230 (581) (796) (996)
Net income (loss) per common share....................... .04 (0.10) (0.14) (0.18)
<CAPTION>
1995 -- THREE MONTHS ENDED MARCH 31 JUNE 30 SEPT. 30 DEC. 31
- --------------------------------------------------------- -------- ------- -------- -------
Revenue.................................................. $6,517 $ 6,707 $4,524 $ 7,016
Net loss................................................. (785) (389) (1,910) (380)
Net loss per common share................................ (0.15) (0.07) (0.35) (0.07)
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
10
<PAGE> 154
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
This information is located in the attached Proxy Statement under the
captions "ELECTION OF DIRECTORS" and "EXECUTIVE OFFICERS."
ITEM 11. EXECUTIVE COMPENSATION.
This information is located in the attached Proxy Statement under the
captions "EXECUTIVE COMPENSATION," "ELECTION OF DIRECTORS -- Director
Compensation" and "ELECTION OF DIRECTORS -- Consulting Agreements with
Directors."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
This information is located in the attached Proxy Statement under the
captions "THE MERGER PROPOSALS -- The Merger" and "SHARE OWNERSHIP."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
This information is located in the attached Proxy Statement under the
caption "EXECUTIVE COMPENSATION -- Certain Transactions" and Note 10 of the
Notes to Consolidated Financial Statements.
11
<PAGE> 155
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) (1) An independent auditors' report and financial statements of IPL
Systems, Inc. can be found on pages F-2 through F-14 of the attached Proxy
Statement.
(a) (2) No report and financial schedule of IPL Systems, Inc. is included
as part of this Annex III.
(a) (3) The following exhibits are filed with the Commission:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -------
<S> <C>
2.1 Agreement and Plan of Merger and Reorganization dated as of February 28, 1997, by
and among the Company, IPL Acquisition Corp., ANDATACO and W. David Sykes, filed as
Exhibit 2.1 to the Company's Current Report on Form 8-K dated as of February 28,
1997, and incorporated herein by reference.
3.1 Restated Articles of Organization dated March 24, 1981, and Articles of Amendment,
dated May 12, 1981, and July 8, 1992, filed as Exhibit 3.1 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1992 (the "1992 Form
10-K"), and incorporated herein by reference.
3.2 By-Laws, as amended, filed as Exhibit 3.2 to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1987 (Commission File No. 0-10370) and
incorporated herein by reference.
10.1 Stockholder Agreement dated as of April 25, 1980, as amended, filed as Exhibit 10.8
to the Company's Registration Statement on Form S-1 (File No. 2-71414) "1981
Registration Statement") and incorporated herein by reference.
10.2 Second Amendment to Stockholder Agreement dated as of May 24, 1989, filed as
Exhibit 10.3. to the Company's Registration Statement on Form S-1 (File No.
33-40454) (the "1991 Registration Statement") and incorporated herein by reference.
10.3 Form of Indemnification Agreement, filed as Exhibit 10.8 to the Company's 1991
Registration Statement and incorporated herein by reference.
10.4 Lease dated August 20, 1992 between the Company and Maynard Industrial Park
Associates, filed as Exhibit 10.2 to the 1992 Form 10-K and incorporated herein by
reference.
10.5 1993 Director Stock Option Plan, filed as Exhibit 10.12 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1993 (the "1993 Form
10-K") and incorporated herein by reference.
10.6 Form of Executive Severance Agreement, filed as Exhibit 10.13 to the 1993 Form 10-K
and incorporated herein by reference.
10.7 1991/1993 Consolidated Equity Incentive Plan, filed as Exhibit 10.9 to the
Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994
(the "1994 Form 10-K") and incorporated herein by reference.
10.8 Consulting Agreement dated as of January 1, 1995 between the Company and
Firecracker Technology Corp., filed as Exhibit 10.8 to the 1994 Form 10-K and
incorporated herein by reference.
10.9 Employment Agreement with Ronald J. Gellert dated as of December 4, 1995 between
the Company and Ronald J. Gellert, filed as Exhibit 10.9 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1995 (the "1995 Form
10-K") and incorporated herein by reference.
10.10 Stock Option Agreement dated as of December 4, 1995 between the Company and Ronald
J. Gellert, filed as Exhibit 10.10 to the 1995 Form 10-K and incorporated herein by
reference to the 1995 Form 10-K and incorporated herein by reference.
10.11 1996 Consolidated Equity Incentive Plan, filed as Exhibit 10.11 to the Company's
Amendment No. 1 to and Restatement of Annual Report on Form 10-K/A for the fiscal
year ended December 31, 1996 (the "Form 10-K/A") and incorporated herein by
reference.
</TABLE>
12
<PAGE> 156
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -------
<S> <C>
10.12 Consulting Agreement dated as of October 1, 1996 between the Company and Cornelius
P. McMullan, filed as Exhibit 10.12 to the 1996 Form 10-K/A and incorporated herein
by reference.
10.13 Consulting Agreement dated as of October 1, 1996 between the Company and Harris
Ravine, filed as Exhibit 10.13 to the 1996 Form 10-K/A and incorporated herein by
reference.
10.14 Consulting Agreement dated as of January 1, 1997 between the Company and BI
Capital, Ltd., filed as Exhibit 10.14 to the 1996 Form 10-K/A and incorporated
herein by reference.
10.15 Form of Consulting Agreement dated as of March 1, 1997 between the Company and
Harris Ravine, filed as Exhibit 10.15 to the 1996 Form 10-K/A and incorporated
herein by reference.
10.16 OEM Agreement dated as of February 25, 1997 between the Company and ANDATACO, filed
as Exhibit 10.16 to the 1996 Form 10-K/A and incorporated herein by reference.*
11.1 Computation of Net Income per Common Share, filed as Exhibit 11.1 to the 1996 Form
10-K/A and incorporated herein by reference.
21.1 List of subsidiaries, filed as Exhibit 22 to the 1991 Registration Statement and
incorporated herein by reference.
23.1 Consent of Deloitte & Touche LLP, Independent Certified Public Accountants, filed
as Exhibit 23.1 to the 1996 Form 10-K/A and incorporated herein by reference.
99.1 Important Factors Regarding Future Results of IPL Systems, Inc., filed as Exhibit
99.1 to the 1996 Form 10-K/A and incorporated herein by reference.
</TABLE>
- ---------------
* Confidential treatment has been requested for a portion of this exhibit.
Upon request and payment of a fee, IPL will provide to any IPL stockholder
a copy of any listed exhibit.
EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS
Exhibits 10.3 and 10.5 through 10.15 to this Form 10-K are management
contracts or compensatory plan arrangements.
REPORTS ON FORM 8-K
There were no reports on Form 8-K filed for the quarter ended December 31,
1996.
13
<PAGE> 157
ANNEX IV
AS PROPOSED TO BE AMENDED
IPL SYSTEMS, INC.
1996 CONSOLIDATED EQUITY INCENTIVE PLAN
1. PURPOSE.
The purpose of the IPL Systems, Inc. 1996 Equity Incentive Plan (the
"Plan") is to attract and retain key personnel of IPL Systems, Inc. (the
"Company") and its affiliates, to provide an incentive for them to achieve
long-range performance goals, and to enable them to participate in the long-term
growth of the Company by the granting of awards ("Awards") with respect to the
Company's Class A Common Stock, $0.01 par value (the "Common Stock"). The option
granted by the Company to one of its employees in December 1995 with respect to
115,000 shares of the Common Stock (the "1995 Equity Plan") shall be
consolidated with and subject to the Plan for all purposes, and shall be amended
and restated in its entirety so as to be consistent with the terms of the Plan
and incentive stock options granted under the Plan to the extent such terms do
not adversely affect the rights and privileges of the holder of the option
granted under the 1995 Equity Plan.
2. ADMINISTRATION.
The Plan will be administered by a committee of not less than two members
of the Board of Directors of the Company appointed by the Board to administer
the Plan (the "Committee"); provided, however, that in any instance the Board of
Directors may take any action delegated hereunder to the Committee. Each member
of the Committee will be a "Non-Employee Director" or the equivalent within the
meaning of Rule 16b-3(b)(3)(i) under the Securities Exchange Act of 1934, as
amended from time to time (the "Exchange Act"). The Committee will select those
persons to receive Awards under the Plan ("Participants") and will determine the
terms and conditions of all Awards. The Committee will have authority to adopt,
alter and repeal such administrative rules, guidelines and practices governing
the operation of the Plan as it from time to time considers advisable, and to
interpret the provisions of the Plan. The Committee's decisions will be final
and binding. To the extent permitted by applicable law, the Committee may
delegate to one or more executive officers of the Company the power to make
Awards to Participants who are not subject to Section 16 of the Exchange Act and
all determinations under the Plan with respect thereto, provided that the
Committee will fix the maximum amount of such Awards for all such Participants
and a maximum for any one Participant.
3. ELIGIBILITY.
All employees, directors and consultants of the Company (or any business
entity in which the Company owns directly or indirectly 50% or more of the total
voting power or has a significant financial interest as determined by the
Committee) capable of contributing significantly to the successful performance
of the Company, other than an employee who has irrevocably elected not to be
eligible, are eligible to be Participants in the Plan.
4. TYPES OF AWARDS.
(a) Stock Options. The Committee may grant options ("Stock Options") to
purchase shares of Common Stock upon such terms and conditions as the Committee
determines. Stock Options may include both incentive stock options that comply
with the requirements of Section 422 of the Internal Revenue Code of 1986, as
amended from time to time (the "Code") and nonstatutory stock options that are
not intended to comply with such requirements. No incentive stock option may be
granted under the Plan more than ten years after the effective date of the Plan.
Payment of the exercise price may be made in cash or, to the extent permitted by
the Committee at or after the grant of the Stock Option, in whole or in part by
delivery of a note or shares of Common Stock owned by the optionee or by
retaining shares otherwise issuable pursuant to the Stock Option, in each case
valued at fair market value on the date of delivery or retention, or such other
lawful consideration as the Committee may determine.
<PAGE> 158
(b) Stock Appreciation Rights. The Committee may grant stock appreciation
rights ("SARs") upon such terms and conditions as the Committee determines. SARs
are rights to receive any excess in value of shares of Common Stock over the
exercise price. The Committee will determine at the time of grant or thereafter
whether SARs are to be settled in cash, Common Stock or other securities of the
Company, other Awards or other property.
5. STOCK AVAILABLE FOR AWARDS.
(a) Amount. Subject to adjustment under subsection (b), Awards may be
made under the Plan for up to 2,500,000 shares of Common Stock. If any Award
expires or is terminated unexercised or is forfeited or settled in a manner that
results in fewer shares outstanding than were awarded, the shares subject to
such Award, to the extent of such expiration, termination, forfeiture or
decrease, will again be available for award under the Plan. Common Stock issued
through the assumption or substitution of outstanding grants from an acquired
company will not reduce the shares available for Awards under the Plan. Shares
issued under the Plan may consist in whole or in part of authorized but unissued
shares or treasury shares.
(b) Adjustment. In the event that the Committee determines that any stock
dividend, extraordinary cash dividend, recapitalization, reorganization, merger,
consolidation, split-up, spin-off, combination, exchange of shares or other
change affects the Common Stock such that an adjustment is required in order to
preserve the benefits intended to be provided by the Plan, then the Committee
(subject in the case of incentive stock options to any limitation required under
the Code) will equitably adjust any or all of (i) the number and kind of shares
for which Awards may be made under the Plan (ii) the number and kind of shares
subject to outstanding Awards and (iii) the exercise price with respect to any
of the foregoing. In making such adjustments, the Committee may ignore
fractional shares so that the number of shares subject to any Award will be a
whole number. If considered appropriate, the Committee may make provision for a
cash payment with respect to all or part of an outstanding Award instead of or
in addition to any such adjustment.
(c) Limit on Individual Grants. Subject to adjustment under subsection
(b), the maximum number of shares of Common Stock subject to Stock Options and
SARs that may be granted to any Participant in the aggregate will not exceed
1,000,000 shares.
6. GENERAL PROVISIONS APPLICABLE TO AWARDS.
(a) Awards at Fair Market Value. The Committee will establish the
exercise price of an Award at the time the Award is granted. The exercise price
will not be less than 100% of the fair market value of the Common Stock on the
date of the Award, provided that (i) in the case of a nonstatutory Stock Option
or a SAR granted to a new employee of the Company within 90 days of the date of
employment, the exercise price may be less than 100% of fair market value on the
date of such Award so long as such price is not less than 100% of fair market
value at the date of employment and (ii) in the case of an SAR granted in tandem
with a Stock Option, the exercise price may be less than 100% of fair market
value on the date of such Award so long as such exercise price is not less than
the exercise price of the related Stock Option.
(b) Fair Market Value. The fair market value of the Common Stock or any
other property will be the fair market value of such property as determined by
the Committee in good faith or in the manner established by the Committee from
time to time.
(c) Limitations on Transferability. Awards will not be transferable by
the Participant other than by will or the laws of des=cent and distribution and
are exercisable during such person's lifetime only by such person or by such
person's guardian or legal representative; provided, however, that the Committee
may, in its discretion, waive such restriction in any case.
(d) Documentation. Each Award under the Plan will be evidenced by a
writing delivered to the Participant specifying the terms and conditions thereof
and containing such other terms and conditions not inconsistent with the
provisions of the Plan as the Committee considers necessary or advisable to
achieve the purposes of the Plan. These terms and conditions may include
performance criteria, vesting requirements,
2
<PAGE> 159
restrictions on transfer and payment rules. The Committee may establish the
terms and conditions at the time the Award is granted or may provide that such
terms and conditions will be determined at any time thereafter.
(e) Committee Discretion. Each type of Award may be made alone, in
addition to or in relation to any other Award. SARs granted in tandem with a
Stock Option will terminate to the extent that the related Stock Option is
exercised, and the related Stock Option will terminate to the extent that the
tandem SARs are exercised. The terms of each type of Award need not be
identical, and the Committee need not treat Participants uniformly. Except as
otherwise provided by the Plan or a particular Award, any determination with
respect to an Award may be made by the Committee at the time of grant or at any
time thereafter.
(f) Dividends and Cash Awards. In the discretion of the Committee, any
Award under the Plan may provide the Participant with (i) dividends or dividend
equivalents payable currently or deferred with or without interest and (ii) cash
payments in lieu of or in addition to an Award.
(g) Termination of Employment. The Committee will determine the effect on
an Award of the disability, death, retirement or other termination of employment
of a Participant and the extent to which, and the period during which, the
Participant's legal representative, guardian or beneficiary may receive payment
of an Award or exercise rights thereunder. A Participant may designate a
beneficiary in a manner determined by the Committee. In the absence of an
effective designation, a Participant's beneficiary will be the Participant's
estate.
(h) Change in Control. In order to preserve a Participant's rights under
an Award in the event of a change in control of the Company, the Committee in
its discretion may, at the time an Award is made or at any time thereafter,
taken one or more of the following actions: (i) provide for the acceleration of
any time period relating to the exercise or payment of the Award, (ii) provide
for payment to the Participant of cash or other property with a fair market
value equal to the amount that would have been received upon the exercise or
payment of the Award had the Award been exercised or paid upon the change in
control, (iii) adjust the terms of the Award in a manner determined by the
Committee to reflect the change in control, (iv) cause the Award to be assumed,
or new rights substituted therefor, by another entity, or (v) make such other
provision as the Committee may consider equitable to the Participant and in the
best interests of the Company.
(i) Loans. The Committee may authorize the making of loans or cash
payments to Participants in connection with the grant or exercise of any Award
under the Plan, which loans may be secured by any security, including Common
Stock, underlying such Award (provided that the loan will not exceed the fair
market value of the security underlying such Award), and which may be forgiven
upon such terms and conditions as the Committee may establish at the time of
such Loan or at any time thereafter.
(j) Withholding Taxes. The Participant will pay to the Company, or make
provision satisfactory to the Committee for payment of, any taxes required by
law to be withheld in respect of Awards under the Plan no later than the date of
the event creating the tax liability. In the Committee's discretion, such tax
obligations may be paid in whole or in part in shares of Common Stock, including
shares retained from the Award creating the tax obligation, valued at fair
market value on the date of delivery. The Company and its affiliates may, to the
extent permitted by law, deduct any such tax obligations from any payment of any
kind otherwise due to the Participant.
(k) Foreign Nationals. Awards may be made to Participants who are foreign
nationals or employed outside the United States on such terms and conditions
different from those specified in the Plan as the Committee considers necessary
or advisable to achieve the purposes of the Plan or to comply with applicable
laws.
(l) Amendment of Award. The Committee may amend, modify or terminate any
outstanding Award, including substituting therefor another Award of the same or
a different type and changing the date of exercise or realization, provided that
the Participant's consent to such action will be required unless the Committee
determines that the action, taking into account any related action, would not
materially and adversely affect the Participant.
3
<PAGE> 160
7. MISCELLANEOUS.
(a) No Right To Employment. No person will have any claim or right to be
granted an Award. Neither the Plan nor any Award hereunder will be deemed to
give any employee the right to continued employment or to limit the right of the
Company to discharge any employee at any time.
(b) No Rights As Shareholder. Subject to the provisions of the applicable
Award, no Participant or beneficiary will have any rights as a shareholder with
respect to any shares of Common Stock to be distributed under the Plan until he
or she becomes the holder thereof. A Participant to whom Common Stock is awarded
will be considered the holder of such Common Stock at the time of the Award
except as otherwise provided in the applicable Award.
(c) Effective Date. The Plan will be effective on March 21, 1996.
(d) Amendment of Plan. The Board of Directors of the Company may amend,
suspend or terminate the Plan or any portion thereof at any time, subject to any
shareholder approval that the Board determines to be necessary or advisable.
(e) Governing Law. The provisions of the Plan will be governed by and
interpreted in accordance with the laws of the Commonwealth of Massachusetts.
4
<PAGE> 161
PROXY
IPL SYSTEMS, INC.
THIS PROXY SOLICITED BY THE BOARD OF DIRECTORS FOR USE AT THE
ANNUAL MEETING OF STOCKHOLDERS, MAY 29, 1997
PROXY: Ronald J. Gellert, Eugene F. Tallone and Nathaniel S. Gardiner, and each
or any of them, with full power of substitution and revocation in each, are
hereby appointed by the undersigned as Proxies to vote all the shares of Class A
Common Stock held of record by the undersigned on April 14, 1997 at the Annual
Meeting of Stockholders of IPL Systems, Inc., or at any adjournment or
postponement of the meeting, on each of the items listed and, in their
discretion, upon such other matters as may properly come before the meeting.
(PLEASE DATE AND SIGN ON REVERSE SIDE AND RETURN PROMPTLY.)
<PAGE> 162
This proxy, when properly executed, will be voted in the manner directed herein
by the undersigned stockholder. If no such directions are given with respect to
all or some items, as to such items, the shares represented by this proxy will
be voted FOR Items 1, 3 and 4 and FOR the Nominees listed below.
Please mark your votes as [X]
indicated in this example
1. Proposal to fix the number of directors at four.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
2. Election of the following nominees as Directors:
Ronald J. Gellert, Stephen J. Ippolito, Cornelius P. McMullan and
Harris Ravine
FOR all nominees WITHHOLD AUTHORITY
(except as indicated) for all Nominees
[ ] [ ]
FOR, except vote withheld from the following nominee(s) only:
---------------------------------------------------------------
3. Proposal (i) to amend IPL's Articles of Organization to authorize an
increase in the Class A Common Stock, $0.01 par value per share ("IPL
Stock"), from 20,000,000 shares to 30,000,000 shares and (ii) to
approve the issuance of the number of shares of IPL Stock required
pursuant to the terms of the Agreement and Plan of Merger and
Reorganization, dated as of February 28, 1997, among IPL, IPL
Acquisition Corp., a wholly-owned subsidiary of IPL, ANDATACO, a
California corporation, and the principal shareholder of ANDATACO.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
<PAGE> 163
4. Proposal to amend the IPL Systems, Inc. 1996 Consolidated Equity
Incentive Plan that would increase the number of shares of Class A
Common Stock, $0.01 par value per share, covered by such plan from
650,000 to 2,500,000 and to increase the number of shares that may be
issued to any one participant from 250,000 to 1,000,000.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
5. To transact such other business as may be in furtherance of or
incidental to the foregoing.
----------------------------------------
Signature
----------------------------------------
Signature
Dated
----------------------------------
Please mark, date, and sign your name as it
appears above and return in the enclosed
envelope. When signing as an attorney,
executor, administrator, trustee, or
guardian, please give title as such. If
signer is a corporation, please sign in
corporate name by authorized officer and
with corporate seal. For joint accounts,
each joint owner should sign.
THIS PROXY MAY BE REVOKED BY GIVING THE
CLERK OF THE COMPANY WRITTEN NOTICE OF
REVOCATION AT ANY TIME BEFORE THE VOTING OF
THE SHARES REPRESENTED BY THIS PROXY.
