<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------
FORM 10-Q
X Quarterly Report Under Section 13 or 15(d) of the Securities Exchange
- --- Act of 1934
For Quarter Ended July 31, 1997
or
Transition report pursuant to Section 13 or 15(d) of the Securities
- --- Exchange Act of 1934
For the transition period from ______________ to ______________
Commission File Number 0-10370
-------
IPL SYSTEMS, INC.
(Exact name of Registrant as specified in its charter)
---------------------------
MASSACHUSETTS 04-2511897
(State or jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
124 ACTON STREET, MAYNARD, MASSACHUSETTS 01754
(Address of principal executive offices and Zip Code)
(508) 461-1000
(Registrant's Telephone Number, including area code)
---------------------------
_______________________________________________________________
Former name, former address, and former fiscal year, if changed
since last report.
Indicate by a check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes ___ No ___
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the last practicable date.
Class Outstanding at July 31, 1997
----- ----------------------------
Class A Common Stock $.01 par value 23,804,399
1
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IPL SYSTEMS, INC.
FORM 10-Q INDEX
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE NO.
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements*
Consolidated Balance Sheet at July 31, 1997 (unaudited)
and October 31, 1996 3
Consolidated Statement of Operations (unaudited) for the
three-month and nine-month periods ended July 31, 1997 and 1996 4
Consolidated Statement of Shareholder's Equity (unaudited) for the
nine months ended July 31, 1997 5
Consolidated Statement of Cash Flows (unaudited) for the
nine-month periods ended July 31, 1997 and 1996 6
Notes to Consolidated Financial Statements (unaudited) 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
PART II. OTHER INFORMATION
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
</TABLE>
* On June 3, 1997 (the "Closing Date"), IPL Systems, Inc. ("IPL" or the
"Company") completed a business combination with ANDATACO, a California
corporation ("ANDATACO"), whereby ANDATACO was merged with a wholly-owned
subsidiary of IPL (the "Merger"). Under the terms of the merger agreement,
the shareholders of ANDATACO were issued a total of 18,078,381 shares of IPL
Class A Common Stock in exchange for all outstanding shares of capital stock
of ANDATACO. Although as a legal matter the Merger resulted in ANDATACO
becoming a wholly-owned subsidiary of IPL, for financial reporting purposes
the Merger was treated as a recapitalization of ANDATACO and an acquisition
of IPL by ANDATACO using the purchase method of accounting (reverse
acquisition). Consequently, the financial reporting requirements of the
Securities and Exchange Commission require that the financial statements
reported by IPL subsequent to the Merger be those of ANDATACO, which will
include the results of operations of IPL from the date of the Merger.
Historically, IPL had a December 31 year end. In June 1997, IPL changed its
fiscal year end from December 31 to October 31. ANDATACO has an October 31
year end (with quarterly periods ending in January, April and July). In May
1997, IPL filed interim financial information for its first quarter ended
March 31, 1997. Subsequent to the Closing Date, ANDATACO filed interim
financial information for its second quarter ended April 30, 1997. Because
of the requirement to account for the Merger as a reverse acquisition, the
financial information contained in this report is that of ANDATACO, which
includes the results of operations of IPL for the months of June 1997 and
July 1997.
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PART I - FINANCIAL INFORMATION
ITEM 1: CONSOLIDATED FINANCIAL STATEMENTS
IPL SYSTEMS, INC.
CONSOLIDATED BALANCE SHEET
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
JULY 31, OCTOBER 31,
1997 1996
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash $ 262,000 $ 765,000
Accounts receivable, net 12,358,000 12,980,000
Inventories 9,580,000 7,149,000
Intangible asset 200,000 --
Other current assets 125,000 214,000
------------ ------------
Total current assets 22,525,000 21,108,000
Goodwill, net 8,083,000 --
Equipment and improvements, net 3,713,000 2,463,000
Other assets 68,000 96,000
------------ ------------
$ 34,389,000 $ 23,667,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 9,463,000 $ 10,053,000
Accrued expenses and other current liabilities 5,992,000 1,959,000
Current portion of notes payable 113,000 164,000
Bank line of credit 7,000,000 --
------------ ------------
Total current liabilities 22,568,000 12,176,000
------------ ------------
Bank line of credit -- 7,053,000
Bonuses payable 273,000 167,000
Notes payable, less current portion 56,000 142,000
Shareholder loan 5,196,000 4,927,000
------------ ------------
Total long-term liabilities 5,525,000 12,289,000
------------ ------------
Shareholders' equity (deficit):
Common stock 238,000 2,000
Additional paid in capital 10,076,000 --
Accumulated deficit (4,018,000) (800,000)
------------ ------------
Total shareholders' equity (deficit) 6,296,000 (798,000)
------------ ------------
$ 34,389,000 $ 23,667,000
============ ============
</TABLE>
See notes to unaudited consolidated financial statements.
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IPL SYSTEMS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
JULY 31, JULY 31,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Sales $ 22,057,000 $ 26,026,000 $ 69,094,000 $ 71,962,000
Cost of sales 17,151,000 21,058,000 53,609,000 58,703,000
------------ ------------ ------------ ------------
Gross profit 4,906,000 4,968,000 15,485,000 13,259,000
------------ ------------ ------------ ------------
Operating expenses:
Selling, general and
administrative 6,098,000 4,175,000 15,939,000 13,209,000
Purchased research and
development 2,400,000 -- 2,400,000 --
Research and development 304,000 118,000 918,000 842,000
------------ ------------ ------------ ------------
Total operating expenses 8,802,000 4,293,000 19,257,000 14,051,000
------------ ------------ ------------ ------------
Income (loss) from operations (3,896,000) 675,000 (3,772,000) (792,000)
Interest expense 273,000 206,000 846,000 569,000
------------ ------------ ------------ ------------
Net income (loss) $ (4,169,000) $ 469,000 $ (4,618,000) $ (1,361,000)
============ ============ ============ ============
Net income (loss) per share $ (0.19) $ 0.03 $ (0.24) $ (0.08)
============ ============ ============ ============
Shares used in computing
net income (loss) per share 21,688,262 18,078,381 19,294,898 18,078,381
============ ============ ============ ============
</TABLE>
See notes to unaudited consolidated financial statements.
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<PAGE> 5
IPL SYSTEMS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
(Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ADDITIONAL
COMMON STOCK PAID IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
<S> <C> <C> <C> <C> <C>
Balance at October 31, 1996 10,000 $ 2,000 $ (800,000) $ (798,000)
Net loss for the seven months
ended May 31, 1997 (unaudited) (600,000) (600,000)
------------ ------------ ------------ ------------ ------------
Balance at May 31, 1997 10,000 2,000 (1,400,000) (1,398,000)
Elimination of S Corporation deficit
against additional paid in capital
(Note 4) $ (1,400,000) 1,400,000 --
Recapitalization of ANDATACO as a
result of Merger with IPL (10,000) (2,000) 2,000 --
IPL common stock outstanding
immediately before Merger 5,633,819 56,000 (56,000) --
Issuance of IPL common stock
in Merger 18,078,381 181,000 11,425,000 11,606,000
Issuance of common stock for
compensation 92,199 1,000 105,000 106,000
Net loss for the two months
ended July 31, 1997 (unaudited) (4,018,000) (4,018,000)
------------ ------------ ------------ ------------ ------------
Balance at July 31, 1997 23,804,399 $ 238,000 $ 10,076,000 $ (4,018,000) $ 6,296,000
============ ============ ============ ============ ============
</TABLE>
See notes to unaudited consolidated financial statements.
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<PAGE> 6
IPL SYSTEMS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JULY 31,
1997 1996
<S> <C> <C>
Cash flows from operating activities:
Net loss $(4,618,000) $(1,361,000)
Adjustments to reconcile net loss to cash
used in operating activities:
Depreciation and amortization 784,000 334,000
Amortization of goodwill 279,000 --
Purchased research and development 2,400,000 --
Stock compensation 106,000 --
Changes in assets and liabilities:
Accounts receivable 1,637,000 (393,000)
Inventories (1,244,000) 1,420,000
Other assets 261,000 37,000
Accounts payable (1,722,000) (414,000)
Accrued expenses and other current liabilities 1,198,000 (367,000)
Bonuses payable 106,000 (108,000)
----------- -----------
Net cash used in operating activities (813,000) (852,000)
Cash flows from investing activities:
Cash acquired in merger transaction (net of
cash expended of $478,000) 676,000 --
Purchases of equipment and improvements (445,000) (613,000)
----------- -----------
Net cash generated from (used in) investing activities 231,000 (613,000)
----------- -----------
Cash flows from financing activities:
Net proceeds (payments) under bank line of credit (53,000) 3,816,000
Proceeds from shareholder loan 269,000 --
Payments on shareholder loan -- (456,000)
Payments on notes payable (137,000) (260,000)
Dividends paid -- (691,000)
----------- -----------
Net cash provided by financing activities 79,000 2,409,000
----------- -----------
Net change in cash (503,000) 944,000
Cash at beginning of period 765,000 305,000
----------- -----------
Cash at end of period $ 262,000 $ 1,249,000
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 584,000 $ 218,000
=========== ===========
</TABLE>
See notes to unaudited consolidated financial statements.
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<PAGE> 7
IPL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 1 - BUSINESS COMBINATION
On June 3, 1997 (the "Closing Date"), IPL Systems, Inc. ("IPL" or the "Company")
completed a business combination with ANDATACO, a California corporation
("ANDATACO"), whereby ANDATACO was merged with a wholly-owned subsidiary of IPL
(the "Merger"). Under the terms of the merger agreement, the shareholders of
ANDATACO were issued a total of 18,078,381 shares of IPL Class A Common Stock in
exchange for all outstanding shares of capital stock of ANDATACO. Although as a
legal matter the Merger will result in ANDATACO becoming a wholly-owned
subsidiary of IPL, for financial reporting purposes the Merger will be treated
as a recapitalization of ANDATACO and an acquisition of IPL by ANDATACO (reverse
acquisition). The financial reporting requirements of the Securities and
Exchange Commission require that the financial statements reported by IPL
subsequent to the Merger be those of ANDATACO, which will include the results of
operations of IPL from the date of the Merger.
The acquisition of IPL by ANDATACO was accounted for using the purchase method.
Accordingly, the purchase price was allocated to the estimated fair market value
of identifiable tangible and intangible assets acquired and liabilities assumed.
Based upon an independent valuation, the Company has allocated $2,400,000 to
acquired in-process research and development for which there is no future
alternative use and $400,000 to existing proprietary technology for which
technological feasibility has been established. As required by generally
accepted accounting principles, the amount allocated to in-process technology
has been recorded as a one-time charge to operations and the amount allocated to
existing technology is being amortized over its estimated remaining useful life.
The excess of the purchase price over the identifiable net assets acquired of
$8,362,000 has been recorded as goodwill and is being amortized on a straight
line basis over its estimated useful life of five years.
The following table sets forth the allocation of the purchase price to the
estimated fair value of identifiable tangible and intangible assets acquired and
liabilities assumed:
<TABLE>
<S> <C>
Purchase Price:
Fair Value (1) of IPL stock of 5,633,819 shares
outstanding immediately before the Merger $ 11,606,000
Transaction costs 478,000
------------
12,084,000
------------
Allocation of Purchase Price:
In-process research and development 2,400,000
Intangible asset 400,000
Tangible assets 4,889,000
Assumed liabilities (3,967,000)
------------
3,722,000
------------
Excess of Purchase Price Over Identifiable
Net Assets $ 8,362,000
============
</TABLE>
Historically, IPL had a December 31 year end. In June 1997, IPL changed its
fiscal year end from December 31 to October 31. ANDATACO has an October 31 year
end (with quarterly periods ending in January, April and July). In May 1997, IPL
filed interim financial information for its first quarter ended March 31, 1997.
Subsequent to the Closing Date, ANDATACO filed interim financial information for
its second quarter ended April 30, 1997.
- ---------------------------------------
(1) The Fair Value of IPL Stock of $2.06 was based on the average market price
of IPL Stock for a period of three days before and after the announcement of
the proposed Merger on February 10, 1997.
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<PAGE> 8
IPL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
Because of the requirement to account for the Merger as a reverse acquisition,
the financial information contained in this report is that of ANDATACO, which
includes the results of operations of IPL for the months of June 1997 and and
July 1997.
The following are unaudited pro-forma results of operations as if the
transaction had been consummated at the beginning of each period presented:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JULY 31,
1997 1996
<S> <C> <C>
Sales $ 73,342,000 $ 89,231,000
============ ============
Net loss $(10,693,000) $ (3,013,000)
============ ============
Net loss per common share $ (0.45) $ (0.13)
============ ============
</TABLE>
The unaudited consolidated balance sheet as of July 31, 1997 and the related
unaudited consolidated statements of operations for the three-month and
nine-month periods ended July 31, 1997 and 1996 and of cash flows for the
nine-month periods ended July 31, 1997 and 1996 have been prepared by the
Company and have not been audited. Such financial statements, in the opinion of
management, include all adjustments (consisting only of normal, recurring
accruals) that the Company considers necessary for a fair presentation of its
financial position, results of operations, and cash flows for such periods.
However, they do not contain all of the information and footnotes required by
generally accepted accounting principles for complete financial statements and
should be read in conjunction with the financial statements and notes thereto
included in ANDATACO's financial statements for the year ended October 31, 1996
included in the IPL Systems, Inc. Proxy Statement dated May 6, 1997. The interim
financial information contained herein is not necessarily indicative of the
results to be expected for the full fiscal year ending October 31, 1997.
NOTE 2- BASIS OF PRESENTATION
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
NOTE 3 - NET INCOME (LOSS) PER SHARE
Net income (loss) per common share is computed based on the weighted average
number of common shares outstanding during each period. For the purpose of this
computation the IPL shares issued to the ANDATACO shareholders in connection
with the Merger have been treated as outstanding at the beginning of each
period. The number of shares of IPL common stock outstanding immediately before
the Merger have been treated as having been issued at the Merger date. Shares
issuable upon exercise of outstanding stock options have been excluded from the
computation as their effect would be antidilutive.
In February 1997, the Financial Accounting Standards Board released Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings per Share", which the
Company will adopt in the first quarter of fiscal 1998. Had SFAS No. 128 been
effective for the three-month and nine-month periods ended July 31, 1997 and
1996, basic and diluted income (loss) per share under SFAS No. 128 would have
been the same as the reported net income (loss) per common share.
-8-
<PAGE> 9
IPL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 4 - INCOME TAXES
Concurrent with the Merger, ANDATACO changed its taxpayer status from a
Subchapter S Corporation to a Subchapter C Corporation. As required by the
reporting requirements of the Securities and Exchange Commission, effective with
that change the Company transferred the amount of its accumulated deficit at
that date to additional paid in capital. Therefore, the Company's accumulated
deficit at July 31, 1997 includes losses solely incurred by the Company since
the Merger.
Prior to the consummation of the Merger, ANDATACO elected to be taxed under
Subchapter S of the Internal Revenue Code of 1986, as amended, and consequently
all federal income taxes and most state taxes were paid directly by its
shareholders. Because of the change in taxpayer status to a Subchapter C
Corporation, the Company will be subject to federal and state income taxes. The
tax provision is calculated giving effect to the change of ANDATACO from a
Subchapter S Corporation to a Subchapter C Corporation, and the resultant
adjustments for U.S. federal and state income taxes as if ANDATACO had been
taxed as a C Corporation rather than an S Corporation since inception. No pro
forma calculation of income taxes is presented because as a Subchapter C
Corporation the Company would not have been liable for income taxes due to
losses sustained.
No income tax provision or benefit was recorded for the three-month and
nine-month periods ended July 31, 1997 and 1996, respectively, 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.
The Company has recorded deferred tax assets and liabilities due to its change
in taxpayer status to a Subchapter C Corporation. The Company has recorded a
valuation allowance in full for deferred tax assets which, more likely than not,
will not be realized based on recent operating results.
NOTE 5 - INVENTORIES
<TABLE>
<CAPTION>
JULY 31, OCTOBER 31,
1997 1996
(Unaudited)
---------- ----------
<S> <C> <C>
Inventories are comprised of the following:
Raw materials $8,526,000 $5,937,000
Work in progress 143,000 366,000
Finished goods 911,000 846,000
---------- ----------
$9,580,000 $7,149,000
========== ==========
</TABLE>
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<PAGE> 10
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the consolidated
financial statements included elsewhere within this quarterly report.
Fluctuations in annual and quarterly results may occur as a result of factors
affecting demand for the Company's products such as the timing of the Company's
and competitors' new product introductions and upgrades. Due to such
fluctuations, historical results and percentage relationships are not
necessarily indicative of the operating results for any future period.
The discussion contained 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. Factors that could cause or
contribute to such differences include but are not limited to, fluctuations in
the Company's operating results, continued new product introductions by the
Company, market acceptance of the Company's new product introductions, new
product introductions by competitors, technological changes in the computer
storage industry and other factors referred to herein including but not limited
to, the factors discussed below . See also "Important Factors Regarding Future
Results of IPL Systems, Inc." under Part II, Item 6, Exhibit 99.1 of this
document. Readers are cautioned not to place undue reliance on these
forward-looking statements which speak only as of the date hereof. The Company
undertakes no obligation to publicly release the result of any revisions to
these forward-looking statements which may be made to reflect events or
circumstances occurring after the date hereof or to reflect the occurrence of
unanticipated events.
OVERVIEW
On June 3, 1997 IPL completed a business combination with ANDATACO whereby
ANDATACO was merged with a wholly-owned subsidiary of IPL (the "Merger"). Under
the terms of the merger agreement, the shareholders of ANDATACO were issued a
total of 18,078,381 shares of IPL Class A Common Stock in exchange for all
outstanding shares of capital stock of ANDATACO. Although as a legal matter the
Merger resulted in ANDATACO becoming a wholly-owned subsidiary of IPL, for
financial reporting purposes the Merger was treated as a recapitalization of
ANDATACO and an acquisition of IPL by ANDATACO (reverse acquisition). The
financial reporting requirements of the Securities and Exchange Commission
require that the financial statements reported by IPL subsequent to the Merger
be those of ANDATACO, which will include the results of operations of IPL from
the date of the Merger.
The acquisition of IPL by ANDATACO was accounted for using the purchase method.
Accordingly, the purchase price was allocated to the estimated fair market value
of identifiable tangible and intangible assets acquired and liabilities assumed.
Based upon an independent valuation, the Company has allocated $2,400,000 to
acquired in-process research and development for which there is no future
alternative use and $400,000 to existing proprietary technology for which
technological feasibility has been established. As required by generally
accepted accounting principles, the amount allocated to in-process technology
has been recorded as a one-time charge to operations and the amount allocated to
existing technology is being amortized over its estimated remaining economic
life. The excess of the purchase price over the identifiable net assets acquired
of $8,362,000 has been recorded as goodwill and is being amortized on a straight
line basis over its estimated useful life of five years.
Historically, IPL had a December 31 year end. In June 1997, IPL changed its
fiscal year end from December 31 to October 31. ANDATACO has an October 31 year
end (with quarterly periods ending in January, April and July). In May 1997, IPL
filed interim financial information for its first quarter ended March 31, 1997.
Subsequent to the Closing Date, ANDATACO filed interim financial information for
its second quarter ended April 30, 1997. Because of the requirement to account
for the Merger as a reverse acquisition, the financial information contained in
this report is that of ANDATACO, which includes the results of operations of IPL
for the months of June 1997 and July 1997.
-10-
<PAGE> 11
DESCRIPTION OF THE COMPANY'S BUSINESS
The Company designs, manufactures, markets and services high availability,
business-critical storage and backup solutions for UNIX and Windows NT
environments. The Company delivers service and support from 19 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.
The Company's product line consists of products developed and manufactured
in-house as well as products obtained from third parties. Third party products
marketed by the Company include add-in memory, add-in SCSI host boards, backup
and restore software products, and total UNIX-based solutions including
workstations, tape libraries, networking and communication products and computer
peripherals. Historically this reseller business accounted for the majority of
the Company's revenues, representing 100% of revenues in FY 1995 and declining
to 46.7% and 45.1% in FY 1996 and for the nine months ended July 31, 1997
respectively.
In the second quarter of fiscal 1996, ANDATACO introduced the GigaRAID product
line, which is the first product designed, developed and manufactured by
ANDATACO in-house. 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 ANDATCO's ESP.
The Company is currently developing new versions of its hardware-based GigaRAID
products. In July 1997 the Company announced the next generation of high
availability RAID for NT and UNIX customers, GigaRAID/HA. GigaRAID/HA is the
first product to be developed which merges IPL's Advanced Controller Technology
with ANDATACO's Enterprise Storage Packaging . In addition, the Company is
currently marketing versions of its ESP as a stand alone product to other
industry OEMs, systems integrators and VARs. Although the Company plans to
continue to sell third party products, management's strategy is to focus
increased resources on the design, development, manufacturing and marketing of
internally developed products. For the nine months ended July 31, 1997 and 1996,
revenue from sale of internally developed GigaRAID products represented 37.1%
and 3.6%, respectively.
RESULTS OF OPERATIONS
Results for the three months ended July 31, 1997 compared to the three months
ended July 31, 1996
Revenues for the third quarter of FY 1997 decreased by $3,969,000, or 15.3%,
from the same period of FY 1996. The decrease was primarily attributable to a
decrease in third-party product sales, which were $11,003,000 in the third
quarter of FY 1997 compared to $14,447,000 in the third quarter of FY 1996.
Although the Company experienced an increase in sales of internally designed
GigaRAID products of $4,978,000 over the same period in 1996, such increase was
offset by a decrease in the sales of non-GigaRAID mass storage products. The
decrease in third-party product sales is consistent with the Company's strategy
to focus its sales organization on internally designed products capable of
producing higher margins. This decrease was further inpacted by the Merger. The
time requirement from management to effect the integration of the two operations
and administrative personnel, and the restructuring of its sales and service
organization, diverted personnel and management resources from, day to day
operating activities to the one-time activities required for the Merger.
-11-
<PAGE> 12
Notwithstanding the decline in revenues, gross profit in the third quarter of FY
1997 was $4,906,000, representing approximately 22.2% of revenues compared to
$4,968,000 in the third quarter of FY 1996, representing approximately 19.1% of
revenues. The increase in gross profit percentage was due primarily to the
increase of revenues generated from the sale of internally designed products as
a percentage of total revenues. That is, internally designed GigaRAID product
sales increased from $2,329,000 for the third quarter of FY 1996 to $7,307,000
for the third quarter of FY 1997. Internally designed product revenues have a
higher gross margin than third-party product revenues. In addition, there was a
reduction in costs of components used to manufacture products in the third
quarter of FY 1997 compared to the third quarter of FY 1996.
Selling, general and administrative expenses for the period consist primarily of
the salaries, commissions and benefits of sales, marketing and customer support
personnel and administrative and corporate services personnel, as well as
consulting, advertising, promotion and certain merger related expenses. Such
expenses were $6,098,000 and $4,175,000 for the quarters ended July 31, 1997 and
1996, respectively. The increase in the current period's selling, general and
administrative expenses over such expenses incurred in the comparable period of
the prior fiscal year represents a combination of certain merger related costs
and a partial reinvestment of expense reductions resulting from the Merger, into
the addition of personnel intended to increase sales of the Company's products
in all channels including direct sales to end users, VARs and OEMs, as well as
support associated therewith.
Research and development expenses consist primarily of salaries, employee
benefits, overhead and outside contractors. Such expenses were $304,000 and
$118,000 for the quarters ended July 31, 1997 and 1996, respectively. The
increase in product development costs for the quarter ended July 31, 1997 over
the comparable period of fiscal 1996 was primarily due to an increase in
personnel and related expenses resulting from the Merger. The resources and
expenditures incurred post Merger were focused on bringing the acquired
in-process technology to the stage of a commercially viable product. This is in
line with the Company's strategy to continue to focus increased resources on
design and development of in-house products and differentiating technologies for
which it believes there is a need in the market. However, there can be no
assurance that product development programs invested in by the Company will be
successful or that products resulting from such programs will achieve market
acceptance.
The acquisition of IPL by ANDATACO was accounted for using the purchase method.
Accordingly, the purchase price was allocated to the estimated fair market value
of identifiable tangible and intangible assets acquired and liabilities assumed.
Based upon an independent valuation, the Company has allocated $2,400,000 to
acquired in-process research and development for which there is no future
alternative use and $400,000 to existing proprietary technology for which
technological feasibility has been established. As required by generally
accepted accounting principles, the amount allocated to in-process technology
has been recorded as a one-time charge to operations and the amount allocated to
existing technology is being amortized over its estimated remaining economic
life. The technology in process purchased in the acquisition is in general terms
the next generation of Database RAID Architecture which merges IPL's Advanced
Controller Technology with ANDATACO's Enterprise Storage Packaging. The research
and development costs incurred after the Merger for the two months ended July
31, 1997 were largely incurred to merge the IPL Advanced Controller Technology
with the ANDATACO packaging technology, resulting in the initial beta shipment
of the GigaRAID/HA in July 1997 and general availability in September 1997. The
post-merger effort in developing this technology represented 33% of the product
development cycle, or a two month period of a total six month product
development period.
Nine months ended July 31,1997 compared to nine months ended July 31, 1996
Revenues for the nine-month period ended July 31, 1997 decreased by $2,868,000,
or 4.0%, from the nine month period ended July 31, 1996. The decrease in
revenues during the first nine months of FY 1997 was primarily attributed to a
decrease in the sales of third-party products of $5,316,000. Although the
Company experienced an increase in the sales of internally designed GigaRAID
products of $23,056,000, such increase was partially offset by a decrease in
non-GigaRAID mass storage products of $20,608,000. The shift from third-party
product and
-12-
<PAGE> 13
non-GigaRAID mass storage product sales to GigaRAID product sales is consistent
with the Company's transition from primarily a value added reseller to a
marketer of both internally designed products and third-party products. The
transition combined with the Merger, has contributed to this decline in
revenues. The time requirement from management to effect the integration of the
two operations and administrative personnel, and the restructuring of its sales
and service organization diverted personnel and management resources from, day
to day operating activities to the one-time activities required for the Merger.
Gross profit increased to $15,485,000 or 22.4% of revenues for the nine-month
period ended July 31, 1997 compared to $13,259,000 or 18.4% of revenues for the
nine-month period ended July 31, 1996. The increase was due primarily to the
increase of revenues generated from the sale of internally designed products as
a percentage of total revenues. That is, internally designed GigaRAID product
sales increased from $2,588,000 for the nine-month period ended July 31, 1996 to
$25,644,000 for the nine-month period ended July 31, 1997. Internally designed
product revenues have a higher gross margin than third-party product revenues.
In addition, there was a reduction in costs of components used to manufacture
products in the nine-month period ended July 31, 1997 compared to the same
period of FY 96.
Selling, general and administrative expenses were $15,939,000 and $13,209,000
for the nine months ended July 31, 1997 and 1996, respectively. The increase in
the current period's selling, general and administrative expenses over such
expenses incurred in the comparable period of the prior fiscal year represents a
combination of certain merger related costs and a partial reinvestment of
expense reductions resulting from the Merger, into the addition of personnel
intended to increase sales of the Company's products in all channels, including
direct sales to end users, VARs and OEMs, as well as support associated
therewith.
Research and development expenses were $918,000 and $842,000 for the nine months
ended July 31, 1997 and 1996, respectively. The increase in product development
costs for the nine months ended July 31, 1997 over the comparable period of
fiscal 1996 was primarily due to an increase in personnel and related expenses
resulting from the Merger, including additional costs incurred to bring the
acquired in-process research and development into a commercially viable product.
This is in line with the Company's strategy to continue to focus increased
resources on design and development of in-house products and differentiating
technologies for which it believes there is a need in the market. However, there
can be no assurance that product development programs invested in by the Company
will be successful or that products resulting from such programs will achieve
market acceptance.
The acquisition of IPL by ANDATACO was accounted for using the purchase method.
Accordingly, the purchase price was allocated to the estimated fair market value
of identifiable tangible and intangible assets acquired and liabilities assumed.
Based upon an independent valuation, the Company has allocated $2,400,000 to
acquired in-process research and development for which there is no future
alternative use and $400,000 to existing proprietary technology for which
technological feasibility has been established. As required by generally
accepted accounting principles, the amount allocated to in-process technology
has been recorded as a one-time charge to operations and the amount allocated to
existing technology is being amortized over its estimated remaining economic
life. The technology in process purchased in the acquisition is in general terms
the next generation of Database RAID Architecture which merges IPL's Advanced
Controller Technology with ANDATACO's Enterprise Storage Packaging. The research
and development costs incurred after the Merger for the two months ended July
31, 1997 were largely incurred to merge the IPL Advanced Controller Technology
with the ANDATACO packaging technology, resulting in the initial beta shipment
of the GigaRAID/HA product in July 1997 and general availability of this product
in September 1997. The post-merger effort in developing this technology
represented approximately 33% of the product development cycle, or a two month
period of a total six month product development period.
-13-
<PAGE> 14
Liquidity and Capital Resources
As of July 31, 1997 and October 31, 1996, the Company's cash balances were
approximately $262,000 and $765,000, respectively. The decrease in cash was
primarily attributable to expenditures made in the normal course of business.
(The changes in assets and liabilities summarized in the statement of cash flows
reflect decreases and increases resulting from the operating activities of the
Company and do not include the increases in assets and liabilities resulting
from the Merger). The $1,244,000 increase in inventories at July 31, 1997
compared to October 31, 1996 is primarily due to a build up of inventory to
support the introduction of the GigaRAID/HA product and in anticipation of
fourth quarter demand. In addition, approximately $1,000,000 of such inventory
increase was due to an inventory return to vendor issue which was subsequently
resolved and resulted in the return of approximately $1,000,00 in inventory and
a decrease in the same amount of accounts payable. The decrease in accounts
receivable and accounts payable of $1,637,000 and $1,722,000 respectively at
July 31, 1997 from October 31, 1996 is primarily due to the lower sales volume
in the third quarter of FY 1997 compared to the same period in FY 1996. The
decrease in accounts payable due to a decrease in volume was partially offset by
an increase in accounts payable due to the return to vendor inventory issue
discussed above. The increase of $1,198,000 in accrued expenses and other
current liabilities is primarily due to the timing of receipt of customer
deposits and billing of post and extended warranty contracts.
The Company acquired approximately $1,154,000 of cash in the Merger. The
Company's cash position at July 31, 1997 was impacted by one-time transaction
costs related to the Merger for both IPL and ANDATACO of approximately $912,000.
The Company currently maintains a credit facility which permits borrowings of
the lesser of $10,000,000 or a percentage of eligible accounts receivable and
inventory ($9,200,000 available at July 31, 1997). As of July 31, 1997, the
Company had outstanding under this credit line approximately $7,000,000. The
credit facility expires on February 15, 1998, consequently borrowings under this
line have been classified as current. The Company is currently renegotiating the
terms of this credit facility with the bank and expects such credit facility to
be renewed for a term of no less than one year.
The shareholder loan is unsecured and due on June 30, 2004, with interest
payable at 9 percent per annum to June 30, 2002 thereafter interest shall be
payable at a rate equal to the "applicable federal rate" per annum published by
the Internal Revenue Service for the month of June 2002 for an instrument with a
two (2) year term.
The Company is currently satisfying all working capital and capital expenditure
requirements through internally generated cash flows from operations, if any,
and borrowings available on its credit facility. Management believes that its
financial position and available borrowings on its credit facility will be
sufficient to meet the operating requirements of its business for a period of at
least twelve months.
Income Taxes
Concurrent with the Merger, ANDATACO changed its taxpayer status from Subchapter
S Corporation to a Subchapter C Corporation. As required by the reporting
requirements of the Securities and Exchange Commission, effective with that
change the Company transferred the amount of its accumulated deficit at that
date to additional paid in capital. Therefore, the Company's accumulated deficit
at July 31, 1997 includes losses solely incurred by the Company since the
Merger.
Prior to the consummation of the Merger, ANDATACO elected to be taxed under
Subchapter S of the Internal Revenue Code of 1986, as amended and consequently
all federal income taxes and most state taxes were paid directly by its
shareholders. Because of the change in taxpayer status to a Subchapter C
Corporation, the Company will be subject to federal and atate income taxes. The
tax provision is calculated giving effect to the change of ANDATACO from a
Subchapter S Corporation to a Subchapter C Corporation, and the resultant
adjustments for U.S. federal and state income taxes as if ANDATACO had been
taxed as a C Corporation rather than an S Corporation since inception. No pro
forma calculation of income tax is presented because as a Subchapter C
Corporation the Company would not have been liable for income taxes due to
losses sustained.
-14-
<PAGE> 15
No income tax provision or benefit was recorded for the three-month and
nine-month periods ended July 31, 1997 and 1996, respectively, 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.
The Company has recorded deferred tax assets and liabilities due to its change
in taxpayer status to a Subchapter C Corporation. The Company has recorded a
valuation allowance in full for deferred tax assets which, more likely than not,
will not be realized based on recent operating results.
-15-
<PAGE> 16
PART II. OTHER INFORMATION
ITEM 5: OTHER INFORMATION
Effective June 3, 1997, IPL changed its fiscal year end from December 31 to
October 31.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
10.1 Compensation Agreement dated as of July 8, 1997 between the
Company and Peter W. Bell
27 Financial Data Schedule
99.1 Important Factors Regarding Future Results of IPL systems,
Inc.
b) Reports on Form 8-K
During the three-month period ended July 31, 1997, the
following current reports were filed by IPL on Form 8-K under
Item 5, Other Events:
1. Current Report on Form 8-K dated June 3, 1997 announcing the
consummation of the merger pursuant to the Agreement and Plan of
Merger and Reorganization dated as of February 28, 1997 by and among
IPL, IPL Acquisition Corporation, ANDATACO and W. David Sykes.
2. Current Report on Form 8-K dated June 10, 1997 announcing the change
in independent accountants.
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IPL SYSTEMS, INC.
Date: September 12, 1997 By: /s/ Harris Ravine
-----------------------------------
Name: Harris Ravine
Title: Chief Executive Officer
(on behalf of registrant and as its
principal executive officer)
Date: September 12, 1997 By: /s/ Richard A. Hudzik
-----------------------------------
Name: Richard A. Hudzik
Title: Vice President of Finance and
Chief Financial Officer
(on behalf of registrant and as its
principal financial officer)
<PAGE> 1
EXHIBIT 10.1 to Third Quarter Form 10-Q
COMPENSATION AGREEMENT
Agreement entered into this 8th day of July, 1997 by and between ANDATACO, doing
business at 10140 Mesa Rim Road, San Diego, CA 92121, and Peter W. Bell,
hereinafter referred to as the Vice President of Worls Wide Sales or "Bell".
WHEREAS, the parties hereto are desirous of entering into an agreement setting
forth the terms and conditions of compensation and commemorating the same in
writing in connection with the development of Andataco's Sales;
Now Therefore, for valuable considerations, the receipt and sufficiency of which
are hereby acknowledged, the parties agree as follows:
EMPLOYMENT AND DUTIES:
ANDATACO hereby employs Bell as the full time Vice President of World Wide
Sales, exempt from all applicable overtime requirements, to sell and promote the
sale of Andataco's Products.
TERRITORY AND CUSTOMERS:
Bell shall perform his/her aforementioned duties within the following territory,
to wit: The World.
QUOTA
Bell will be tasked with the production of a cumulative minimum contribution
margin ("CMCM") for all world wide sales personnel for whom he is responsible.
The CMCM for the remainder of the Company's fiscal year ending October 31, 1997
attributable to Bell shall be as mutually agreed not later than August 1, 1997.
The CMCM for the ensuing fiscal years shall be as approved by the Company's
Board of Directors not later than the end of the first calendar month of said
fiscal period.
COMPENSATION:
1. Bell shall be paid a salary of $12,500.00 per month pursuant to ANDATACO's
normal payroll practices.
2. Bell will be eligible for ongoing bonus payments as per the bonus plan
attached for the fourth quarter of FY 1997. These payments are based on the
achievement of budgeted contribution margins.
3. All compensation hereunder shall be subject to Bell's indebtedness to
ANDATACO arising under the following circumstances, to wit:
a. purchase of evaluation equipment.
<PAGE> 2
b. conditional purchase orders managed by Bell.
Provided, however, that such indebtedness must be specifically identified as
being attributable to Bell prior to the time it is satistified against
compensation.
4. Compensation shall be subject to deductions attributable to Federal and
State taxes, and applicable insurance premiums.
5. ANDATACO shall pay, each month, a car allowance of $400.00. The Company
shall pay for all customary and reasonable cellular expenses and business
expenses, paid in accordance with the Company's normal payroll policies.
CONDITIONS OF SALE AND ACCEPTANCE OF ORDERS:
ANDATACO expressly reserves the right to adjust prices, set conditions of sales,
and accept or reject orders.
MERGER:
This agreement shall supersede all prior commission agreements. However, all
agreements between the parties hereto relative to confidentiality, proprietary
information, employment, and the "Plan", shall specifically survive.
TERM OF AGREEMENT:
This agreement shall be automatically renewed on the anniversary date hereof for
a like period unless otherwise terminated as hereinafter set forth.
TERMINATION:
Either party may terminate this agreement by providing the other written notice
thereof. In the event of such termination:
1. Bell shall immediately provide ANDATACO with a detailed written status
report of all customers, prospects, pending activities, and account
contacts.
2. Bell shall immediately return all property belonging to ANDATACO, such as
equipment, literature, customer files and correspondence, to the President.
3. Commissions earned, but unpaid hereunder, shall be paid at 100% commission
rate, less any indebtedness. Commissions earned subsequent to termination
shall be paid at 50% of the normal rate. Such ratable payments contemplate
the intervention of another Bell in order to conclude the subject matter
with minimal business interruption.
<PAGE> 3
NOTICE:
All notices hereunder shall be in writing and served in person or by certified
mail at either parties principal place of business or residence. The postmark
shall be considered as the date of notice.
ENTIRE AGREEMENT:
This agreement represents the entire understanding between the parties hereto,
except as hereinbefore set forth, and shall inure to the benefit of their
successors and assigns. Any modification must be in writing and executed by both
parties. Nothing herein shall be construed as enabling Bell to bind ANDATACO.
SEVERABILITY:
Each term, condition, covenant or provision of this Agreement shall be viewed as
separate and distinct, and in the event that any such term, covenant or
provision shall be held by a court of competent jurisdiction to be invalid, the
remaining provisions shall continue in full force and effect.
WAIVER:
A waiver by either party of a breach of provision or provisions of this
agreement shall not constitute a general waiver, or prejudice the other party's
right otherwise to demand strict compliance with that provision or any other
provisions in this Agreement.
INCONSISTENCY:
The terms of this agreement shall prevail in the event of a conflict with any
existing agreements or plans between the parties hereto.
CONSTRUCTION OF AGREEMENT:
This Agreement shall be construed according to the laws of the State of
California.
DISPUTES AND ARBITRATION:
The parties agree that any disputes or questions arising hereunder, including
the construction or application of this Agreement, shall be settled by
arbitration in accordance with the rules of the American Arbitration Association
then in force. If the parties cannot agree upon an arbitrator with ten (10) days
after demand of either party, either or both parties may request the American
Arbitration Association to name a panel of five (5) arbitrators. Andataco shall
strike the names of two (2) on this list; the Bell shall then strike two (2)
names; and the remaining name shall be the arbitrator. The decision of the
arbitrator shall be final and binding upon the parties, both as to law and to
fact, and shall not be appealable to any court in any jurisdiction. The expenses
of the arbitrator shall be shared equally by the parties, unless the arbitrator
determines that the expenses shall be otherwise assessed.
<PAGE> 4
IN WITNESS WHEREOF, the parties have hereunto executed this agreement the day
and year first above written.
ANDATACO: BELL:
by: /s/ W. David Sykes by:/s/ Peter W. Bell
dated: 7/9/97 dated: 7/10/97
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> OCT-31-1996
<PERIOD-END> JUL-31-1997
<CASH> 262
<SECURITIES> 0
<RECEIVABLES> 12,984
<ALLOWANCES> (626)
<INVENTORY> 9,580
<CURRENT-ASSETS> 22,522
<PP&E> 16,056
<DEPRECIATION> (12,343)
<TOTAL-ASSETS> 34,389
<CURRENT-LIABILITIES> 22,568
<BONDS> 0
0
0
<COMMON> 238
<OTHER-SE> 6,058
<TOTAL-LIABILITY-AND-EQUITY> 34,389
<SALES> 69,094
<TOTAL-REVENUES> 69,094
<CGS> 53,609
<TOTAL-COSTS> 53,609
<OTHER-EXPENSES> 19,257
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 846
<INCOME-PRETAX> (4,618)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,618)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,618)
<EPS-PRIMARY> (0.24)
<EPS-DILUTED> (0.24)
</TABLE>
<PAGE> 1
EXHIBIT 99.1 to 1997 Third Quarter FORM 10-Q
IMPORTANT FACTORS REGARDING FUTURE RESULTS OF IPL SYSTEMS, INC.
Rapid Technological and Market Changes. The market for the Company's products is
characterized by rapidly changing technology and evolving customer needs which
increasingly shorten the life cycles of existing products and require ongoing
development and introduction of new products at an increasingly more rapid rate.
The Company's ability to realize its expectations will depend on its success at
enhancing its current offerings, developing new products that keep pace with
developments in technology and meet evolving customer requirements for
performance and price, and delivering those products with appropriate customer
service and support. This will require, among other things, correctly
anticipating customer needs, hiring and retaining personnel with the necessary
skills and creativity, providing adequate resources for product development.
Failure by the Company to anticipate or respond adequately to technological
developments and customer requirements, significant delays in the development,
product testing, or availability of new or enhanced products, or the failure of
customers to accept such products, could adversely affect the Company's
technological position and operating results. Furthermore, there can be no
assurance that the Company's competitors will not succeed in developing products
or technologies that have superior price/performance characteristics compared to
any products being offered or developed by the Company.
Competition. The computer data storage industry is intensely competitive and is
characterized by rapid technological change and constant price pressure. The
Company competes with a number of companies offering computer data storage,
back-up and recovery systems, including host computer vendors such as Sun
Microsystems and Hewlett-Packard and independent storage suppliers, including,
MTIC, Network Appliances, IBM, and EMC and others some of which have
substantially greater financial, product development, marketing and distribution
resources than the Company. The Company believes that to date no dominant leader
has emerged in the high bandwidth segment of the open systems storage market.
Due to the large and growing storage requirements in this market the Company
will continue to face strong pricing and technological competition as
competitors attempt to establish a leadership position.
Fluctuations in Operating Results; Recent Losses. The Company has recently
experienced losses from operations and may in the future experience further
losses and significant period-to-period fluctuations in operating results. The
Company's revenues in any quarter are dependent on the timing of product
shipments as well as the status of competing product introductions. Like many
other high technology companies, a disproportionately large percentage of
quarterly sales occur in the closing weeks of each quarter. Any forward-looking
statements about operating results made by members of management will be based
on assumptions about the likelihood of closing sales then in the pipeline and
other factors management considers reasonable based in part on knowledge of
performance in prior periods. The failure to consummate any of those sales may
have a disproportionately negative impact on operating results, given the
Company's relatively fixed costs, and may thus prevent management's projections
from being realized.
Patents and Protection of Proprietary Technology. The Company believes that its
success in developing new products depends primarily upon the technical
competence and creative skills of its personnel rather than on the ownership of
copyrights or patents. Although the Company believes that its products and other
proprietary rights do not infringe the proprietary rights of third parties,
there can be no assurance that other third parties will not assert infringement
claims against the Company or that such claims will not be successful. If any
infringement exists the Company would seek, based upon industry practice,
licenses to such patents, but there can be no assurance that the Company will be
able to obtain any such licenses on terms which would not have a material
adverse effect on its business. The Company also relies on unpatented
proprietary technology, and there can be no assurance that others may not
independently develop the same or similar technology or otherwise obtain access
to the Company's proprietary technology. To protect its rights in these areas,
the Company requires all employees to enter into confidentiality agreements.
There can be no assurance that these agreements will provide meaningful
protection for the Company's trade secrets, know-how or other proprietary
information in the event of any
<PAGE> 2
unauthorized use, misappropriation or disclosure of such trade secrets, know-how
or other proprietary information. If the Company is unable to maintain the
proprietary nature of its technologies, the Company's business could be
adversely affected.
Dependence on Key Personnel. The success of the Company's operations depends on
its ability to attract and retain experienced technical, sales, marketing and
management personnel. Such personnel are in great demand and the Company must
compete for their services. Management's projections necessarily assume that the
Company will continue to attract and retain such personnel, so the failure to do
so could have a material adverse effect on the Company's ability to develop and
market competitive products.
Dependence on Suppliers. The Company has and will continue to rely on outside
vendors to manufacture certain subsystems and electronic components and
subassemblies used in the production of the Company's products. Certain
components, subassemblies, materials and equipment necessary for the manufacture
of the Company's products are obtained from a sole supplier or a limited group
of suppliers. The Company's reliance on sole suppliers or a limited group of
suppliers involves several risks, including a potential inability to obtain an
adequate supply of required products and reduced control over the price, timely
delivery, reliability and quality of finished products. The Company does not
have any long-term supply agreements with its suppliers. Certain of the
Company's suppliers have relatively limited financial and other resources. Any
inability to obtain timely deliveries of products and services having acceptable
qualities or any other circumstance that could require the Company to seek
alternative sources of supply or to manufacture its own electronic components,
subassemblies and manufacturing equipment internally, could delay the Company's
ability to ship its products. Any such delay could damage relationships with
customers and could have a material adverse effect on the Company's business and
operating results.
Quarterly Trends, New Product Introductions. The Company historically has
experienced significant fluctuations in its revenues and operating results,
including net income, and anticipates that these fluctuations will continue.
Quarterly results have been or may in the future be influenced by the timing of
announcements or introductions of new products and product upgrades by the
Company or its competitors, customer ordering patterns, product returns, and
delays in product development. In addition, new products typically have a
lengthy evaluation period before any purchase is made.
Competition and Risks Associated with New Product Introductions. The market for
the Company's products is intensely competitive. Increased competition could
result not only in a decline in sales volume, but also in price reductions that
could have a material adverse effect on the Company's business, operating
results and financial condition.
Stock Price Volatility. Due to the factors noted above, the Company's future
earnings and stock price may be subject to significant volatility, particularly
on a quarterly basis. Any shortfall in earnings from levels expected by
securities analysts could have an immediate and significant adverse effect on
the trading price of the Company's common stock in any given period. Shortfalls
could be caused by shortfalls in revenues, and/or increased levels of
expenditures. Additionally, the Company participates in a highly dynamic
industry, which often results in significant volatility of the Company's stock
price.
