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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 MARCH 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
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IPL SYSTEMS, INC.
(Exact name of Registrant as specified in its charter)
----------------------
MASSACHUSETTS 04-2511897
(State or jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
124 ACTON STREET, MAYNARD, MASSACHUSETTS 01754
(Address of principal executive offices and Zip Code)
(508) 461-1000
(Registrant's Telephone Number, including area code)
----------------------
--------------------------------------------------------------------------
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 X 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 latest practicable date.
CLASS OUTSTANDING AT MARCH 31, 1997
----- -----------------------------
Class A $.01 par value 5,633,819
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IPL SYSTEMS, INC.
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FORM 10-Q INDEX
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Page No.
--------
Part I. Financial Information
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - March 31, 1997
(Unaudited) and December 31, 1996 ...................... 3
Consolidated Statements of Operations (Unaudited) -
Three Months Ended March 31, 1997
and March 31, 1996 ..................................... 4
Consolidated Statements of Cash Flows (Unaudited) -
Three Months Ended March 31, 1997 and March 31,
1996 ................................................... 5
Notes to Unaudited Quarterly Consolidated Statements ... 6-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ................... 9-11
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K ...................... 12
Signatures ............................................ 13
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PART I. FINANCIAL INFORMATION
- -----------------------------
Item 1. Consolidated Financial Statements
IPL SYSTEMS, INC.
-----------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(Thousand of Dollars)
<TABLE>
<CAPTION>
ASSETS
------
(Unaudited)
March 31, 1997 December 31, 1996
-------------- -----------------
<S> <C> <C>
Current Assets:
Cash and equivalents $ 1,918 $ 2,274
Accounts receivable-net 1,477 2,391
Inventories 2,567 3,892
Other current assets 302 428
-------- --------
Total Current Assets 6,264 8,985
Equipment and Improvements, net 1,518 1,629
-------- --------
Total Assets $ 7,782 $ 10,614
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 1,338 $ 2,031
Accrued expenses 1,892 2,033
Shareholders' Equity:
Class A Common Stock, par value
$.01: Authorized, 20,000,000 shares;
issued and outstanding, 5,633,819
and 5,633,819 shares 56 56
Additional paid-in capital 17,379 17,379
Deficit (12,883) (10,885)
-------- --------
Total Shareholders' Equity 4,552 6,550
-------- --------
Total Liabilities and Shareholders'
Equity $ 7,782 $ 10,614
======== ========
</TABLE>
See notes to unaudited quarterly consolidated financial statements.
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PART I. FINANCIAL INFORMATION - Continued
-----------------------------------------
IPL SYSTEMS, INC.
-----------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
(Unaudited)
(Thousands of Dollars, Except Per Share Amounts)
<TABLE>
<CAPTION>
Three Months Ended
March 31, March 31,
1997 1996
--------- ---------
<S> <C> <C>
Revenue:
Product $ 1,796 $ 6,241
Service 437 860
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Total revenue 2,233 7,101
Cost of sales 1,620 4,289
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Gross profit 613 2,812
Expenses:
Selling, general & administrative 2,263 2,367
Engineering & development 350 365
Restructure expense (income) -- (100)
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Operating (loss) income (2,000) 180
Other income 3 50
--------- ---------
(Loss) income before income taxes (1,997) 230
Income tax -- --
--------- ---------
Net (loss) income $ (1,997) $ 230
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Net (loss) income per share $ (0.35) $ 0.04
========= =========
Common and common equivalent
shares used in calculation
of (loss) income per share 5,633,819 5,739,614
--------- ---------
</TABLE>
See notes to unaudited quarterly consolidated financial statements.
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PART I. FINANCIAL INFORMATION - CONTINUED
- -----------------------------------------
IPL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Thousands of Dollars)
<TABLE>
<CAPTION>
Three Months Ended
----------------------
March 31, March 31,
1997 1996
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .................................................... $(1,997) $ 230
------- -------
Adjustments, to reconcile net loss to net cash from operating
activities:
Restructure expenses (income) ............................... -- (100)
Depreciation and amortization ............................... 146 249
Changes in assets and liabilities:
Accounts receivable ...................................... 915 (592)
Inventories .............................................. 1,324 (271)
Prepaid expenses and other current assets ................ 126 65
Accounts payable and accrued expenses .................... (835) 269
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Total adjustments .................................... 1,676 (380)
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Net cash used for operating activities ....................... (321) (150)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to equipment and improvements ..................... (35) (13)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of stock ............................. -- 20
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CASH AND EQUIVALENTS:
Net decrease ................................................ 356 143
BALANCE, beginning of period ................................ 2,274 3,595
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BALANCE, end of period ...................................... $ 1,918 $ 3,452
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SUPPLEMENTARY CASH FLOW INFORMATION:
Taxes paid .................................................. $ 41 $ 3
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</TABLE>
See notes to unaudited quarterly consolidated financial statements.
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PART I. FINANCIAL INFORMATION - CONTINUED
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IPL SYSTEMS, INC.
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NOTES TO UNAUDITED QUARTERLY CONSOLIDATED STATEMENTS
----------------------------------------------------
1. Financial Statements
The consolidated balance sheet as of March 31, 1997, and the
consolidated statements of operations and cash flows for the three
month periods ended March 31, 1997 and March 31, 1996 have been
prepared by the Company without audit. The consolidated financial
statements include the accounts for the Company and its wholly-owned
subsidiaries, IPL Investments, Inc. and IPL Foreign Sales Corporation.
All intercompany accounts and transactions have been eliminated. In
the opinion of management, all adjustments (which include only normal
recurring adjustments) necessary to present fairly the financial
position of the Company and the results of its operation for all
periods presented, have been made.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been omitted pursuant to the Securities and
Exchange Commission rules and regulations. It is suggested that these
financial statements be read in conjunction with the Company's Annual
Report on Form 10-K for the year ended December 31, 1996, including
the audited financial statements and related notes included therein.
Net income (loss) per common share is computed based in the weighted
average number of common shares outstanding during each quarter.
Shares issuable upon exercise of outstanding stock options have been
excluded from the computation if 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 fourth quarter of
1997. Had SFAS No. 128 been effective for the quarters ended March 31,
1997 and March 31, 1996, basic and dilutive earnings (loss) per share
under SFAS No. 128 would have been the same as the reported net income
(loss) per common share.
The results of operations for the period ended March 31, 1997 are not
necessarily indicative of the operating results for the full year.
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PART I. FINANCIAL INFORMATION - CONTINUED
- -----------------------------------------
2. Accounts Receivable
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Accounts receivable consist of the following:
<TABLE>
<CAPTION>
(Thousands of dollars)
March 31, 1997 December 31, 1996
-------------- -----------------
<S> <C> <C>
Total accounts receivable $1,830 $2,744
Less allowance for doubtful
accounts 353 353
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Net Accounts Receivable $1,477 $2,391
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<CAPTION>
3. Equipment and Improvements
Equipment and improvements consist of the following:
(Thousands of dollars)
March 31, 1997 December 31, 1996
-------------- -----------------
<S> <C> <C>
Customer support equipment $ 3,174 $ 3,104
Manufacturing equipment 4,949 4,931
Office equipment & fixtures 2,138 2,191
Leasehold improvements 1,339 1,339
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11,600 11,565
Less accumulated depreciation 10,082 9,936
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$ 1,518 $ 1,629
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</TABLE>
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PART I. FINANCIAL INFORMATION - CONTINUED
- -----------------------------------------
4. Restructuring
-------------
In November 1994, the Company approved and executed a restructuring program
which included accruing certain related costs.
The changes in the restructuring accrual are as follows:
<TABLE>
<CAPTION>
Balance Balance
December 31, 1996 Paid March 31, 1997
----------------- ---- --------------
<S> <C> <C> <C>
Occupancy Costs $292 $66 $226
</TABLE>
The occupancy costs will be paid through March 31, 1998.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- -------------------------------------------------------------------------------
OF OPERATIONS
- -------------
OVERVIEW
- --------
The discussion contained in this item as well as elsewhere in this report may
contain forward-looking statements based on the current expectations of the
Company's management. Such statements are subject to certain risks and
uncertainties which would cause actual results to differ materially from those
projected. See "Important Factors Regarding Forward-Looking Statements of IPL
Systems, Inc." Filed as Exhibit 99.1 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1996, which is incorporated by reference
into this report. Readers are cautioned not to place undue reliance on these
forward-looking statements which speak only as of the date hereof. The Company
undertakes no obligation to publicly release the result of any revisions to
these forward-looking statements which may be made to reflect events or
circumstances occurring after the date hereof or to reflect the occurrence of
unanticipated events.
The Company and ANDATACO entered into a definitive agreement dated as of
February 28, 1997 to merge the two companies. IPL management believes that a
successful merger will 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 not be reduced in order to provide a break-even cash flow and
permit the Company's continuance as a going concern. 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 continue operations
as a going concern.
On April 9, 1997, IPL reduced its staff by thirteen people and incurred $40,000
in severance cost. This reduction was a result of reduced sales as well as
reduced manufacturing cost associated with the OEM Agreement.
RESULTS OF OPERATIONS
---------------------
Quarterly Results
- -----------------
The Company reported revenues of $2,333,000 with a net loss of $1,997,000, or
$0.35 per share, compared to revenues of $2,422,000, with a net loss of
$996,000, or $0.18 per share, for the fourth quarter of 1996. The difference in
net loss between the fourth quarter of 1996 and the first quarter of 1997 was
the effect of the fourth quarter 1996 partial recovery of a previously reserved
bad debt in the amount of $386,000, and $543,000 of expenses for the
merger-related activities in the first quarter 1997. Additionally, excluding
merger-related cost in the first quarter, the Company reduced its operating
expenses by $308,000, or 13%, compared to the fourth quarter of 1996, and has
made further expense reductions in the second quarter of 1997. Considering
these factors, management believes that the net loss for the first quarter of
1997 was materially consistent with the level of loss in the fourth quarter of
1996.
Revenues for the first quarter of 1997 were $2,233,000 compared to $7,101,000
for the first quarter of 1996, representing a 69% decrease. In light of the
continuing competitive pressures and difficulties in attracting and retaining a
direct sales force, and thus in contemplation of the merger agreement with
ANDATACO, IPL entered into an OEM agreement in the first quarter of 1997 making
ANDATACO the principal channel of distribution for IPL products. In conjunction
with the OEM agreement, ANDATACO hired many of the IPL salespeople and
purchased $425,000 of IPL product in March 1997 and has made further purchases
in the second quarter. Additionally, beginning in the second quarter, the
Company has been selling certain of its products directly through the ANDATACO
sales force on a commission basis. International sales continued to decline
because of the changing business priorities of the Company's overseas
distributors. In the first quarter of 1997, the Company's sales of open systems
products were 59% of total product revenue. In the U.S. 77% of sales were in
open systems products while 17% of international sales were from open systems
products. Total U.S. sales were 73% and international sales were 27% in the
first quarter of 1997 compared with 77% and 23% respectively for the same
quarter in 1996.
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Disk subsystems sales accounted for 71% of revenue in the first quarter of 1997
approximately the same percentage as in the same quarter of 1996. Tape sales
accounted for 2% and 14% respectively for the comparable periods of 1997 and
1996. The Company has not been promoting tape sales in both 1997 and 1996.
In the first quarter of 1997, the gross margin was 27.5% compared to 39.6% in
the same period last year. The reduction of 12.1% is primarily due to selling
product on an OEM basis to ANDATACO and to international distributors at lower
gross margins. The application of overhead cost also reduced gross margin due to
lower sales volume.
Selling, general and administrative expenses were $2,263,000 in the first
quarter of 1997 (including merger expenses of $543,000) compared to $2,367,000
in 1996. The first quarter 1997 selling expenses exclusive of merger expenses
reflects the transition of the IPL sales force to ANDATACO in March 7.
Engineering and development expenses decreased $15,000 in the first quarter of
1997 compared to the first quarter of 1996. The focus during the quarter was the
joint development of the first RAID storage product incorporating the technology
of both IPL and ANDATACO for delivery anticipated for the end of June, 1997.
Other income decreased to $3,000 in 1997 from $50,000 in 1996 primarily due to
lower average cash balances during 1997.
The Company had no federal tax liability in the first quarter of 1997. 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 in varying amounts 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.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
The Company's cash and equivalents as of March 31, 1997 were $1,918,000 compared
with $2,274,000 at December 31, 1996. Accounts receivable decreased from
$2,391,000 at December 31, 1996 to $1,477,000 at March 31, 1997. This decrease
was the result of lower sales and increased collections of past due accounts
receivable. Inventories decreased 34% to $2,567,000 primarily due to lower
inventory purchases and an increase of $300,000 in inventory reserves. Accounts
payable and accrued expenses decreased $834,000 due to reduced inventory
purchasing requirements.
If the merger with ANDATACO is delayed or terminated or the OEM agreement with
ANDATACO does not produce significantly higher levels of sales and cash
receipt than it has to date, IPL will need to liquidate assets or seek outside
sources of financing. There can be no assurances, however, that the terms of
such asset sales or financing will be reasonable or available.
10
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PART II. OTHER INFORMATION - Continued
- --------------------------------------
Item 6. Exhibits and Reports on Form 8-K
----------------------------------------
(a) Exhibits Page No.
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Exhibit 11 Computation of Net Loss Per Common Share. 15
(b) Reports on Form 8-K
-------------------
The following reports on Form 8-K were filed with the Securities
and Exchange Commission during the fiscal quarter ended March 31,
1996.
February 10, 1997 - Signing of letter of intent to merge with
ANDATACO.
February 28, 1997 - Signing of definitive agreement and plan of
merger and reorganization with ANDATACO.
12
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SIGNATURES
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IPL SYSTEMS, INC.
-----------------
DATE: May 15, 1997 By: /s/ Ronald J. Gellert
-----------------------------------
Ronald J. Gellert
President
Chief Executive Officer
By: /s/ Eugene F. Tallone
-----------------------------------
Eugene F. Tallone
Chief Financial Officer
Principal Accounting Officer
13
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IPL SYSTEMS, INC.
FORM 10-Q, MARCH 31, 1996
EXHIBIT INDEX
-------------
Exhibit
No. Description Page No.
- ------- ----------- --------
11. Computation of weighted average shares used in
computing earnings per share amounts. Filed herewith 15
14
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EXHIBIT 11
IPL SYSTEMS, INC.
-----------------
COMPUTATION OF NET (LOSS) INCOME PER COMMON SHARE
-------------------------------------------------
(Thousands of dollars except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
---------------------------
March 31, March 31
1997 1996
---------- ---------
<S> <C> <C>
Primary
- -------
Net (loss) income $ (1,997) $ 230
---------- ----------
Weighted average shares outstanding 5,633,819 5,590,555
Dilutive stock options based on the
treasury stock method using average
market price for the period -- 149,059
---------- ----------
Common shares used in calculation of
net (loss) income per share 5,633,819 5,739,614
========== ==========
Net (loss) income per share $ (0,35) $ 0.04
========== ==========
Fully Diluted
- -------------
Net (loss) income $ (1,997) $ 230
---------- ----------
Weighted average shares outstanding 5,633,819 5,590,555
Dilutive stock options based on the
treasury stock method using the
higher of average or period end
market price (A) -- 246,343
---------- ----------
Common shares used in calculation of
net (loss) income per share 5,633,819 5,836,898
========== ==========
Net (loss) income per share $ (0.35) 0.04
========== ==========
</TABLE>
(A) This calculation is presented in accordance with Item 601 of Regulation S-X
although it is not required by Paragraph 14 of APB Opinion No. 15.
15
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<EXCHANGE-RATE> 1
<CASH> 1,918
<SECURITIES> 0
<RECEIVABLES> 1,830
<ALLOWANCES> 353
<INVENTORY> 2,567
<CURRENT-ASSETS> 6,264
<PP&E> 11,600
<DEPRECIATION> 10,082
<TOTAL-ASSETS> 7,782
<CURRENT-LIABILITIES> 3,230
<BONDS> 0
0
0
<COMMON> 56
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 7,782
<SALES> 2,233
<TOTAL-REVENUES> 2,233
<CGS> 1,620
<TOTAL-COSTS> 4,233
<OTHER-EXPENSES> (3)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,997)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,997)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,997)
<EPS-PRIMARY> (.35)
<EPS-DILUTED> (.35)
</TABLE>
