<PAGE> 1
================================================================================
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 April 30, 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 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 last practicable date.
Class Outstanding at June 3, 1997
----- ---------------------------
Class A Common Stock $.01 par value 23,712,200
1
<PAGE> 2
ANDATACO
FORM 10-Q INDEX
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page No.
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements*
Balance Sheet at April 30, 1997 (unaudited)
and October 31, 1996 3
Statement of Operations (unaudited) for the
three-month and six-month periods ended April 30, 1997 and 1996 4
Statement of Cash Flows (unaudited) for the six-month periods
ended April 30, 1997 and 1996 5
Notes to Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 13
PART II. OTHER INFORMATION
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
</TABLE>
* On June 3, 1997 (the "Closing Date"), IPL Systems, Inc. ("IPL")
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 ANDATACO. Although as a legal matter the Merger
will result in ANDATACO becoming a subsidiary of IPL, for financial
reporting purposes the Merger will be 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. Because of the requirement to
account for the Merger as a reverse acquisition, the interim financial
information contained in this report is solely that of ANDATACO for its
second quarter ended April 30, 1997. IPL will file interim financial
information for its third quarter ending July 31, 1997, which period
will include the effects of the Merger (and will include the results of
operations of IPL for the months of June and July and the results of
operations of ANDATACO for the months of May, June and July).
-2-
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
ANDATACO
BALANCE SHEET
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
APRIL 30, OCTOBER 31,
1997 1996
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash $ 435,000 $ 765,000
Accounts receivable, net 12,819,000 12,980,000
Inventories 6,775,000 7,149,000
Other current assets 377,000 214,000
------------ ------------
Total current assets 20,406,000 21,108,000
Equipment and improvements, net 2,464,000 2,463,000
Other assets 125,000 96,000
------------ ------------
$ 22,995,000 $ 23,667,000
============ ============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 8,917,000 $ 10,053,000
Accrued expenses and other current liabilities 2,663,000 1,959,000
Current portion of notes payable 113,000 164,000
------------ ------------
Total current liabilities 11,693,000 12,176,000
------------ ------------
Bank line of credit 7,000,000 7,053,000
Bonuses payable 268,000 167,000
Notes payable, less current portion 85,000 142,000
Shareholder loan 5,196,000 4,927,000
------------ ------------
Total long-term liabilities 12,549,000 12,289,000
------------ ------------
Shareholders' deficit:
Common stock 2,000 2,000
Accumulated deficit (1,249,000) (800,000)
------------ ------------
Total shareholders' deficit (1,247,000) (798,000)
------------ ------------
$ 22,995,000 $ 23,667,000
============ ============
</TABLE>
See notes to unaudited financial statements.
-3-
<PAGE> 4
ANDATACO
STATEMENT OF OPERATIONS
(Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
APRIL 30, APRIL 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Sales $ 21,540,000 $ 20,385,000 $ 47,037,000 $ 45,936,000
Cost of sales 16,953,000 16,744,000 36,458,000 37,645,000
------------ ------------ ------------ ------------
Gross profit 4,587,000 3,641,000 10,579,000 8,291,000
------------ ------------ ------------ ------------
Operating expenses:
Selling, general and
administrative 4,542,000 4,564,000 9,835,000 9,034,000
Research and development 150,000 326,000 614,000 724,000
------------ ------------ ------------ ------------
Total operating expenses 4,692,000 4,890,000 10,449,000 9,758,000
------------ ------------ ------------ ------------
Loss (income) from operations (105,000) (1,249,000) 130,000 (1,467,000)
Interest expense 228,000 179,000 573,000 363,000
------------ ------------ ------------ ------------
Loss before provision for
income taxes (333,000) (1,428,000) (443,000) (1,830,000)
Provision for income taxes 6,000 -- 6,000 --
------------ ------------ ------------ ------------
Net loss $ (339,000) $ (1,428,000) $ (449,000) $ (1,830,000)
============ ============ ============ ============
Net loss per share $ (33.90) $ (142.80) $ (44.90) $ (183.00)
============ ============ ============ ============
Shares used in computing
net loss per share 10,000 10,000 10,000 10,000
============ ============ ============ ============
Unaudited pro forma data:
Loss before pro forma
benefit from income taxes $ (333,000) $ (1,428,000) $ (443,000) $ (1,830,000)
Pro forma benefit from
income taxes (137,000) (585,000) (182,000) (750,000)
------------ ------------ ------------ ------------
Loss after pro forma
benefit from income
taxes $ (196,000) $ (843,000) $ (261,000) $ (1,080,000)
============ ============ ============ ============
Pro forma net loss
per share $ (19.60) $ (84.30) $ (26.10) $ (108.00)
============ ============ ============ ============
</TABLE>
See notes to unaudited financial statements.
-4-
<PAGE> 5
ANDATACO
STATEMENT OF CASH FLOWS
(Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS ENDED
APRIL 30,
1997 1996
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (449,000) $(1,830,000)
Adjustments to reconcile net loss to cash
used in operating activities:
Depreciation and amortization 300,000 220,000
Changes in assets and liabilities:
Accounts receivable 161,000 814,000
Inventories 374,000 1,251,000
Other assets (192,000) 82,000
Accounts payable (1,136,000) (478,000)
Accrued expenses and other current liabilities 704,000 (245,000)
Bonuses payable 101,000 15,000
----------- -----------
Net cash used in operating activities (137,000) (171,000)
----------- -----------
Cash flows from investing activities:
Purchases of equipment and improvements (301,000) (512,000)
----------- -----------
Net cash used in investing activities (301,000) (512,000)
----------- -----------
Cash flows from financing activities:
Net payments (proceeds) under bank line of credit (53,000) 2,037,000
Proceeds from shareholder loan 269,000 --
Payments on shareholder loan -- (458,000)
Payments on notes payable (108,000) (172,000)
Dividends paid -- (691,000)
----------- -----------
Net cash provided by financing activities 108,000 716,000
----------- -----------
Net change in cash (330,000) 33,000
Cash at beginning of period 765,000 305,000
----------- -----------
Cash at end of period $ 435,000 $ 338,000
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 472,000 $ 218,000
=========== ===========
</TABLE>
See notes to unaudited financial statements.
-5-
<PAGE> 6
ANDATACO
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 1 - GENERAL
On June 3, 1997 (the "Closing Date"), IPL Systems, Inc. ("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 ANDATACO.
Although as a legal matter the Merger will result in ANDATACO becoming a
subsidiary of IPL, for financial reporting purposes the Merger will be 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.
Because of the requirement to account for the Merger as a reverse acquisition,
the interim financial information contained in this report is solely that of
ANDATACO for its second quarter ended April 30, 1997. IPL will file interim
financial information for its third quarter ending July 31, 1997, which period
will include the effects of the Merger (and will include the results of
operations of IPL for the months of June and July and the results of operations
of ANDATACO for the months of May, June and July).
The ANDATACO balance sheet as of April 30, 1997 and the related statements of
operations and of cash flows for the three-month and six-month periods ended
April 30, 1997 and 1996 have been prepared by ANDATACO and have not been
audited. Such financial statements, in the opinion of management, include all
adjustments (consisting only of normal, recurring accruals) that ANDATACO
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 IPL's 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 LOSS PER SHARE
Net loss per common share is computed based on 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
ANDATACO will adopt in the first quarter of fiscal 1998. Had SFAS No. 128 been
effective for the three-month and six-month periods ended April 30, 1997 and
1996, basic and diluted loss per share under SFAS No. 128 would have been the
same as the reported net loss per common share.
-6-
<PAGE> 7
ANDATACO
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 4 - UNAUDITED PRO FORMA DATA
The unaudited pro forma data presented in the statement of operations reflect
ANDATACO's conversion from an S Corporation to a 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. The
differences between financial reporting and tax bases of assets and liabilities
are not significant.
NOTE 5 - INVENTORIES
<TABLE>
<CAPTION>
APRIL 30, OCTOBER 31,
1997 1996
(Unaudited)
<S> <C> <C>
Inventories are comprised of the following:
Raw materials $6,042,000 $5,937,000
Work in progress 168,000 366,000
Finished goods 565,000 846,000
---------- ----------
$6,775,000 $7,149,000
========== ==========
</TABLE>
NOTE 6 - 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, as required by SEC reporting requirements (see Note 1). The
unaudited pro forma combined balance sheet as of April 30, 1997 has been
prepared as if the Merger was consummated on April 30, 1997. The unaudited pro
forma combined statement of operations for the year ended October 31, 1996 and
for the six-month periods ended April 30, 1997 and 1996 give effect to the
Merger as if it were consummated on November 1, 1995.
Based on the Fair Value of $2.06 per share of IPL Stock (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), ANDATACO
anticipates that the excess purchase price over the tangible net assets and
identifiable intangible assets of IPL purchased is currently estimated to be
approximately $7.4 million; however, this estimated amount is subject to
reduction based on the allocation of the purchase price as determined by an
independent valuation to be conducted as of the Closing Date.
The historical information presented for IPL (i) for the year ended September
30, 1996 is derived from the unaudited financial statements of IPL for the
twelve months then ended, and (ii) as of March 31, 1997 and for the six months
ended March 31, 1997 and 1996 is derived from the unaudited financial statements
of IPL as of that date and for the periods then ended.
The historical information for ANDATACO (i) 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 April 30, 1997 and for the six months ended April 30, 1997
and 1996 is derived from the unaudited financial statements of ANDATACO as of
that date and for the periods then ended.
The unaudited pro forma combined financial statements have been prepared by
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 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.
-7-
<PAGE> 8
ANDATACO
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
PRO FORMA COMBINED BALANCE SHEET (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
ANDATACO IPL ----------------------------
APRIL 30, MARCH 31,
1997 1997 ADJUSTMENTS COMBINED
-------- -------- ----------- ---------
<S> <C> <C> <C> <C>
ASSETS:
Current assets:
Cash $ 435 $ 1,918 $ -- $ 2,353
Accounts receivable, net 12,819 1,477 -- 14,296
Inventories 6,775 2,567 15 (2) 9,357
Other current assets 377 302 -- 679
-------- -------- -------- --------
Total current assets 20,406 6,264 15 26,685
Equipment and improvements, net 2,464 1,518 304 (2) 4,286
Other assets 125 -- -- 125
Goodwill -- -- 7,439 (3) 7,439
-------- -------- -------- --------
$ 22,995 $ 7,782 $ 7,758 $ 38,535
======== ======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 8,917 $ 1,338 $ -- $ 10,255
Accrued expenses and other
current liabilities 2,663 1,892 404 (2) 4,959
Current portion of notes payable 113 -- -- 113
-------- -------- -------- --------
Total current liabilities 11,693 3,230 404 15,327
-------- -------- -------- --------
Long-term liabilities:
Bank line of credit 7,000 -- -- 7,000
Bonuses payable 268 -- -- 268
Notes payable, less current portion 85 -- -- 85
Shareholder loan 5,196 -- -- 5,196
-------- -------- -------- --------
Total long-term liabilities 12,549 -- -- 12,549
-------- -------- -------- --------
Shareholders' equity (deficit):
Common stock 2 56 181 (1) 239
Additional paid in capital -- 17,379 (6,959)(1)(4) 10,420
Accumulated deficit (1,249) (12,883) 14,132 (1)(4) --
-------- -------- -------- --------
Total shareholders' equity (deficit) (1,247) 4,552 7,354 10,659
-------- -------- -------- --------
$ 22,995 $ 7,782 $ 7,758 $ 38,535
======== ======== ======== ========
</TABLE>
-8-
<PAGE> 9
ANDATACO
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
PRO FORMA COMBINED STATEMENT OF OPERATIONS (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
--------------------------------- -----------------------------------
ANDATACO IPL
SIX MONTHS SIX MONTHS
ENDED ENDED
APRIL 30, MARCH 31,
1997 1997 ADJUSTMENTS COMBINED
<S> <C> <C> <C> <C>
Sales $ 47,037 $ 4,655 $ -- $ 51,692
Cost of sales 36,458 2,663 -- 39,121
------------ ------------ ------------ ------------
Gross profit 10,579 1,992 -- 12,571
------------ ------------ ------------ ------------
Operating expenses:
Selling, general and administrative 9,835 4,258 774(6)(7) 14,867
Research and development 614 733 -- 1,347
------------ ------------ ------------ ------------
Total operating expenses 10,449 4,991 774 16,214
------------ ------------ ------------ ------------
Income (loss) from operations 130 (2,999) (774) (3,643)
Other income (expense):
Interest income -- 6 -- 6
Interest expense (573) -- -- (573)
------------ ------------ ------------ ------------
Total other income (expense) (573) 6 -- (567)
------------ ------------ ------------ ------------
Loss before provision for income taxes (443) (2,993) (774) (4,210)
Provision for income taxes 6 -- -- 6
------------ ------------ ------------ ------------
Net loss $ (449) $ (2,993) $ (774) $ (4,216)
============ ============ ============ ============
Net loss per share -- $ (0.53) -- $ (0.18)
============ ============ ============ ============
Shares used in computing net loss
per share -- 5,626,000 18,078,000 23,704,000
============ ============ ============ ============
</TABLE>
-9-
<PAGE> 10
ANDATACO
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
PRO FORMA COMBINED STATEMENT OF OPERATIONS (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
--------------------------------- ----------------------------------
ANDATACO IPL
YEAR ENDED YEAR ENDED
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 (5) 93,079
------------ ------------ ------------ ------------
Gross profit 19,358 8,969 (15) 28,312
------------ ------------ ------------ ------------
Operating expenses:
Selling, general and administrative 17,569 9,362 1,549 (6)(7) 28,480
Research and development 919 1,408 -- 2,327
Restructuring -- (100) -- (100)
------------ ------------ ------------ ------------
Total operating expenses 18,488 10,670 1,549 30,707
------------ ------------ ------------ ------------
Income (loss) from operations 870 (1,701) (1,564) (2,395)
Other income (expense):
Interest income 1 147 -- 148
Interest expense (773) -- -- (773)
Other (59) 28 -- (31)
------------ ------------ ------------ ------------
Total other income (expense) (831) 175 -- (656)
------------ ------------ ------------ ------------
Income (loss) before provision for
income taxes 39 (1,526) (1,564) (3,051)
Provision for income taxes -- -- -- --
------------ ------------ ------------ ------------
Net income (loss) $ 39 $ (1,526) $ (1,564) $ (3,051)
============ ============ ============ ============
Net loss per share -- $ (0.27) -- $ (0.13)
============ ============ ============ ============
Shares used in computing net loss
per share -- 5,634,000 18,078,000 23,712,000
============ ============ ============ ============
</TABLE>
-10-
<PAGE> 11
ANDATACO
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
PRO FORMA COMBINED STATEMENT OF OPERATIONS (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
--------------------------------- ---------------------------------
ANDATACO IPL
SIX MONTHS SIX MONTHS
ENDED ENDED
APRIL 30, MARCH 31,
1996 1996 ADJUSTMENTS COMBINED
<S> <C> <C> <C> <C>
Sales $ 45,936 $ 14,117 $ -- $ 60,053
Cost of sales 37,645 8,533 15 (5) 46,193
------------ ------------ ------------ ------------
Gross profit 8,291 5,584 (15) 13,860
------------ ------------ ------------ ------------
Operating expenses:
Selling, general and administrative 9,034 5,222 774 (6)(7) 15,030
Research and development 724 717 -- 1,441
Restructuring -- (100) -- (100)
------------ ------------ ------------ ------------
Total operating expenses 9,758 5,839 774 16,371
------------ ------------ ------------ ------------
Loss from operations (1,467) (255) (789) (2,511)
Other income (expense):
Interest income -- 200 -- 200
Interest expense (363) -- -- (363)
Other -- (94) -- (94)
------------ ------------ ------------ ------------
Total other income (expense) (363) 106 -- (257)
------------ ------------ ------------ ------------
Loss before provision for income taxes (1,830) (149) (789) (2,768)
Provision for income taxes -- -- -- --
------------ ------------ ------------ ------------
Net loss $ (1,830) $ (149) $ (789) $ (2,768)
============ ============ ============ ============
Net loss per share -- $ (0.03) -- $ (0.12)
============ ============ ============ ============
Shares used in computing net loss
per share -- 5,617,000 18,078,000 23,695,000
============ ============ ============ ============
</TABLE>
-11-
<PAGE> 12
ANDATACO
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
- -------------------------------------------------------------------------------
ADJUSTMENTS
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.
(2) The allocation of the purchase price to record at fair value the IPL
tangible net assets acquired by ANDATACO.
(3) The excess of acquisition cost over the fair value of the tangible net
assets and identifiable intangible assets acquired. This estimated
allocation is subject to reduction based on an independent valuation
to be conducted as of the Closing Date.
(4) The elimination of ANDATACO's $1,249,000 accumulated deficit against
additional paid in capital in connection with ANDATACO's change from a
Subchapter S Corporation to a Subchapter C Corporation effective at
the Closing Date.
(5) Increase in cost of sales reflecting the sale of the inventory
acquired at fair value.
(6) Additional depreciation resulting from increased basis of equipment
and improvements 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
shareholders for taxes payable by such shareholders 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.
INCOME TAXES
With respect to the unaudited pro forma balance sheet, ANDATACO 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 unaudited pro forma statement 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 six months ended April 30,
1997 and 1996 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.
NET LOSS PER SHARE
Pro forma per share calculations are based upon the weighted average number of
pre-Merger shares of IPL common stock outstanding plus the aggregate number of
IPL shares issued in connection with the Merger.
-12-
<PAGE> 13
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The discussion contained in this report may contain forward-looking
statements based on the current expectations of IPL's management. Such
statements are subject to certain risks and uncertainties which could cause
actual results to differ materially from those projected. See "Important
Facts Regarding Forward-Looking Statements of IPL Systems, Inc." filed as
Exhibit 99.1 to IPL's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996, which is incorporated by reference in this report.
Readers are cautioned not to place undue reliance on these forward-looking
statements which speak only as of the date hereof. IPL 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 (the "Closing Date"), IPL Systems, Inc. ("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 ANDATACO. Although as a legal matter the merger will
result in ANDATACO becoming a subsidiary of IPL, for financial reporting
purposes the Merger will be 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. Because of the requirement to account for the Merger as a
reverse acquisition, the interim financial information contained in this
report is solely that of ANDATACO for its second quarter ended April 30,
1997. IPL will file interim financial information for its third quarter
ending July 31, 1997, which period will include the effects of the Merger
(and will include the results of operations of IPL for the months of June
and July and the results of operations of ANDATACO for the months of May,
June and July).
Description of ANDATACO's Business
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 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.
-13-
<PAGE> 14
Results of Operations
Results for the Second Quarter of Fiscal Year 1997 ended April 30, 1997
compared to the Second Quarter of Fiscal Year 1996 ended April 30, 1996
Revenues for the second quarter of FY 1997 of $21,540,000 increased by
$1,155,000, or 5.7%, over the same period of FY 1996. The increase was
primarily attributed to an increase in sales of ANDATACO'S internally
designed GigaRAID products following their introduction in the second
quarter of FY 1996. GigaRAID product sales were $7,036,000 in the second
quarter of FY 1997 compared to $259,000 in the second quarter of FY 1996.
The GigaRAID product sales surpassed the previous year's sales of
non-GigaRAID, or mass storage, products that they are replacing, in line
with ANDATACO'S strategy to develop and market differentiated technologies
capable of producing higher margins.
Gross profit increased to $4,587,000 in the second quarter of FY 1997,
representing approximately 21.3% of revenues, compared to $3,641,000 in the
second quarter of FY 1996, representing approximately 17.9% of revenues.
The increase was due primarily to higher profit margins on ANDATACO'S
GigaRAID product line, as well as a reduction in costs of components used
to manufacture ANDATACO'S products.
Total operating expenses decreased to $4,692,000 in the second quarter of
FY 1997 from $4,890,000 in the second quarter of FY 1996. The decrease in
total operating expenses was primarily attributable to decreases in
research and development expenses in the second quarter of FY 1997. The
decreases in research and development expenses, however, are the result of
the timing of such expenses and are not the result of any decreases in
overall research and development being performed by ANDATACO. ANDATACO
expects research and development expenses to increase as it continues to
design and develop new products.
Operating expenses decreased in the second quarter of FY 1997 also because
of reductions in personnel as ANDATACO began the transition to a design and
development company from its former focus on reselling and distributing
products from other manufacturers. ANDATACO anticipates that selling and
marketing expenses will increase as it continues to staff appropriately for
the design and development model.
Certain one-time charges are expected to be incurred in the third quarter
as a result of the merger, primarily the potential write-off of acquired
in-process research and development. This amount will be determined by an
independent valuation to be conducted as of the Closing Date. This one-time
charge could be as much as $2,500,000.
Six months ended April 30, 1997 compared to six months ended April 30, 1996
Revenues for the six-month period ended April 30, 1997 of $47,037,000
increased by $1,101,000, or 2.4%, over the six-month period ended April 30,
1996. The increase in revenues during the first six months of FY 1997 is
the result of an increase in sales of ANDATACO'S internally designed
GigaRAID products. GigaRAID product sales were $18,341,000 in the first six
months of FY 1997 and $259,000 in the first six months of FY 1996. The
GigaRAID product sales
-14-
<PAGE> 15
surpassed the previous year's sales of non-GigaRAID, or mass storage,
products that they are replacing, in line with the ANDATACO'S strategy to
develop and market differentiated technologies capable of producing higher
margins.
Gross profit increased to 22.5% of revenues for the six-month period ended
April 30, 1997, compared to 18.0% of revenues for the same period of FY
1996. The increase in gross profit was primarily attributable to higher
margins on the GigaRAID product line, as well as a reduction in the costs
of components used to manufacture ANDATACO'S products.
Total operating expenses increased to $10,449,000 in the six-month period
ended April 30, 1997 from $9,758,000 for the same period of FY 1996. The
increase was principally the result of increased selling, general and
administrative expenses related to the hiring of additional sales personnel
during the first quarter of FY 1997 (decreases were then made in the second
quarter of FY 1997). The increase in selling, general and administrative
expenses was slightly offset by a decrease in research and development
expenses.
Average borrowings from all sources during the first six months of FY 1997
were $13,163,000 compared to average borrowings of $8,347,000 for the same
period of FY 1996. This increase in average borrowings resulted in an
increase in interest expense of $210,000 for the first six months of FY
1997 over the comparable period of FY 1996.
Liquidity and Capital Resources
As of April 30, 1997 and October 31, 1996, ANDATACO'S cash balance was
approximately $435,000 and $765,000, respectively. The decrease in cash was
primarily attributable to the timing of payments to vendors as well as
legal and accounting fees associated with the merger (these legal and
accounting fees were included in other current assets at April 30, 1997
pending completion of the merger).
Inventories decreased by approximately 5.2% to $6,775,000 at April 30, 1997
compared to $7,149,000 at October 31, 1996. Accounts payable decreased by
11.3% ($1,136,000) at April 30, 1997 from October 31, 1996. The decrease in
accounts payable was primarily due to the timing of payments to vendors as
noted above, as well as the timing of product purchases.
ANDATACO currently maintains a credit facility which permits borrowings of
the lesser of $10,000,000 or a percentage of eligible accounts receivable
and inventory. As of April 30, 1997, ANDATACO had borrowings under this
credit line of approximately $7,000,000.
Management believes that ANDATACO'S cash and availability under the line of
credit are sufficient to meet the operating requirements and integration
costs of its existing business for a period of at least twelve months.
Income Taxes
Prior to the consummation of the Merger, ANDATACO elected to be taxed under
Subchapter S of the Internal Revenue Code of 1986, as amended (the "Code"),
and consequently all federal
-15-
<PAGE> 16
income taxes and most state taxes were paid directly by its shareholders.
Concurrent with the consummation of the Merger, ANDATACO elected to be
taxed as a Subchapter C corporation under the Code. Consequently, ANDATACO
will be subject to federal and state corporate income taxes. On a pro forma
basis, ANDATACO would have recorded income tax benefits at 41%, which is
the approximate combined rate for both federal and state taxes.
-16-
<PAGE> 17
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
Effective June 3, 1997, IPL changed its fiscal year end from December 31 to
October 31. The transition period will be covered by IPL's Form 10-K for the
year ended October 31, 1997.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
2.1 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.(1)
10.1 OEM Agreement dated as of February 25, 1997 between IPL and
Andataco.(2)
10.2 Consulting Agreement dated as of March 1, 1997 between the
Company and Harris Ravine.(2)
27 Financial Data Schedule
(b) Reports on Form 8-K
During the three month period ended April 30, 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 February 10, 1997 announcing
the signing of a letter of intent to enter into an agreement and plan of
reorganization whereby ANDATACO would be merged with a to-be-formed wholly owned
subsidiary of IPL.
2. Current Report on Form 8-K dated February 28, 1997 announcing
the signing of the Agreement and Plan of Reorganization as of February 28, 1997
by and among IPL, IPL Acquisition Corporation, ANDATACO and W. David Sykes.
- ------------
(1) Filed with the SEC as an Exhibit to IPL's Current Report on Form 8-K dated
February 28, 1997, and incorporated herein by this reference.
(2) Filed with the SEC as an Exhibit to IPL's Annual Report on Form 10-K/A for
the Fiscal Year Ended December 31, 1996, and incorporated herein by this
reference.
-17-
<PAGE> 18
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: June 13, 1997 By: /s/ Harris Ravine
--------------------------------
Name: Harris Ravine
Title: Chief Executive Officer
(on behalf of registrant and as its
principal executive officer)
Date: June 13, 1997 BY: /s/ Richard A. Hudzik
--------------------------------
Name: Richard A. Hudzik
Title: Vice President Finance and
Chief Financial Officer
(on behalf of registrant and as its
principal financial officer)
-18-
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