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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
AND EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED JULY 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
AND EXCHANGE ACT OF 1934.
FOR THE TRANSITION PERIOD FROM ____TO ____ .
COMMISSION FILE NUMBER: 0-10370
ANDATACO, INC.
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formerly IPL Systems, Inc.
(Exact name of Registrant as specified in its charter)
MASSACHUSETTS 04-2511897
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(State or jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10140 MESA RIM RD., SAN DIEGO, CALIFORNIA 92121
(Address of principal executive offices and Zip Code)
(619) 453-9191
(Registrant's Telephone Number, including area code)
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 and Exchange Act
of 1934 during the preceding 12 months (or for such shorter periods that the
Registrant was required to file such reports), and (2) has been subject to
filing requirements for the past 90 days. Yes [X] No [ ]
As of September 5, 1998 there were 23,819,399 shares of the Registrant's common
stock, $0.01 par value, issued and outstanding.
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ANDATACO, INC.
FORM 10-Q INDEX
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PAGE NO.
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheet at July 31, 1998 (unaudited)
and October 31, 1997 3
Consolidated Statement of Operations (unaudited) for the
three-month and nine-month periods ended July 31, 1998 and 1997 4
Consolidated Statement of Cash Flows (unaudited) for the
nine-month period ended July 31, 1998 and 1997 5
Notes to Consolidated Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
PART II. OTHER INFORMATION
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures
3
PART I - FINANCIAL INFORMATION
ITEM 1: CONSOLIDATED FINANCIAL STATEMENTS
ANDATACO, INC.
CONSOLIDATED BALANCE SHEET
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JULY 31, OCTOBER 31,
1998 1997
------------ ------------
(UNAUDITED)
ASSETS
Current assets:
Cash $ 320,000 $ 41,000
Accounts receivable, net 8,352,000 10,846,000
Inventories 4,959,000 7,458,000
Other current assets 406,000 353,000
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Total current assets 14,037,000 18,698,000
Goodwill, net 6,411,000 7,665,000
Equipment and improvements, net 3,660,000 3,599,000
Other assets 1,000 27,000
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$ 24,109,000 $ 29,989,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,569,000 $ 7,660,000
Accrued expenses 2,674,000 4,202,000
Deferred revenue 2,417,000 1,554,000
Current portion of notes payable -- 113,000
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Total current liabilities 11,660,000 13,529,000
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Long-term liabilities:
Bank line of credit 5,000,000 6,500,000
Notes payable, less current portion -- 28,000
Shareholder loan 5,196,000 5,196,000
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Total long-term liabilities 10,196,000 11,724,000
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Shareholders' equity:
Common stock 238,000 238,000
Additional paid in capital 10,107,000 10,107,000
Accumulated deficit (8,092,000) (5,609,000)
------------ ------------
Total shareholders' equity 2,253,000 4,736,000
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$ 24,109,000 $ 29,989,000
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See notes to unaudited consolidated financial statements.
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ANDATACO, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
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THREE MONTHS ENDED NINE MONTHS ENDED
JULY 31, JULY 31,
--------------------------------- ---------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
Sales $ 17,092,000 $ 22,057,000 $ 59,848,000 $ 69,094,000
Cost of sales 12,733,000 17,151,000 42,033,000 53,609,000
------------ ------------ ------------ ------------
Gross profit 4,359,000 4,906,000 17,815,000 15,485,000
------------ ------------ ------------ ------------
Operating expenses:
Selling, general and
administrative 5,325,000 6,015,000 17,788,000 15,690,000
Rent expense to shareholder 83,000 83,000 249,000 249,000
Purchased research and
development -- 2,400,000 -- 2,400,000
Research and development 568,000 304,000 1,482,000 918,000
------------ ------------ ------------ ------------
Total operating expenses 5,976,000 8,802,000 19,519,000 19,257,000
------------ ------------ ------------ ------------
Loss from operations (1,617,000) (3,896,000) (1,704,000) (3,772,000)
Interest expense 140,000 156,000 428,000 501,000
Interest expense to shareholder 117,000 117,000 351,000 345,000
------------ ------------ ------------ ------------
Net loss $ (1,874,000) $ (4,169,000) $ (2,483,000) $ (4,618,000)
============ ============ ============ ============
Loss per share:
Basic $ (0.08) $ (0.19) $ (0.10) $ (0.24)
============ ============ ============ ============
Diluted $ (0.08) $ (0.19) $ (0.10) $ (0.24)
============ ============ ============ ============
Shares used in computing
net loss per share
Basic 23,819,399 21,688,262 23,819,399 19,294,898
============ ============ ============ ============
Diluted 23,819,399 21,688,262 23,819,399 19,294,898
============ ============ ============ ============
See notes to unaudited consolidated financial statements.
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ANDATACO, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
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NINE MONTHS ENDED
JULY 31,
-------------------------------
1998 1997
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Cash flows from operating activities:
Net loss $(2,483,000) $(4,618,000)
Adjustments to reconcile net loss to cash
provided by (used in) operating activities:
Depreciation and amortization 1,237,000 784,000
Amortization of goodwill 1,254,000 279,000
Purchased research and development -- 2,400,000
Stock compensation -- 106,000
Changes in assets and liabilities:
Accounts receivable 2,494,000 1,637,000
Inventories 2,499,000 (1,244,000)
Other assets (27,000) 261,000
Accounts payable (1,091,000) (1,722,000)
Accrued expenses (1,528,000) 1,304,000
Deferred revenue 863,000 --
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Net cash provided by (used in) operating activities 3,218,000 (813,000)
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Cash flows from investing activities:
Cash acquired in merger transaction (net of
cash expended of $478,000) -- 676,000
Payments for purchases of property and equipment (1,298,000) (445,000)
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Net cash (used in) provided by investing activities (1,298,000) 231,000
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Cash flows from financing activities:
Payments under bank line of credit agreement,net (1,500,000) (53,000)
Proceeds from shareholder loan -- 269,000
Payments on notes payable (141,000) (137,000)
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Net cash (used in) provided by financing activities (1,641,000) 79,000
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Net increase (decrease) in cash 279,000 (503,000)
Cash at beginning of period 41,000 765,000
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Cash at end of period $ 320,000 $ 262,000
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See notes to unaudited consolidated financial statements.
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ANDATACO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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NOTE 1- NAME CHANGE
On April 8, 1998, the Company held its Annual Meeting of Shareholders. At the
meeting, the shareholders approved the amendment of the Company's Articles of
Organization to change the name of IPL Systems, Inc. to Andataco, Inc.
Concurrent with that change, the Company also changed the name of its wholly
owned subsidiary ANDATACO to ANDATACO of California.
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.
The accompanying unaudited consolidated financial statements of Andataco, Inc.
("ADT", or the "Company") have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission regarding interim
financial reporting. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements and should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's annual report
on Form 10-K for the year ended October 31, 1997. In the opinion of management,
the accompanying unaudited consolidated financial statements contain all
adjustments, consisting of only normal recurring items, necessary for a fair
presentation of the Company's financial position as of July 31, 1998 and its
results of operations for the three-month and nine-month periods ended July 31,
1998 and 1997. The interim financial information contained herein is not
necessarily indicative of the results to be expected for any other interim
period or the full fiscal year ending October 31, 1998.
NOTE 3- BUSINESS COMBINATION
On June 3, 1997 (the "Closing Date"), ADT (formally IPL Systems, Inc.) completed
a business combination with ANDATACO of California (formally ANDATACO), whereby
ANDATACO of California was merged with a wholly-owned subsidiary of ADT (the
"Merger"). Under the terms of the merger agreement, the shareholders of ANDATACO
of California were issued a total of 18,078,381 shares of ADT Class A Common
Stock in exchange for all outstanding shares of capital stock of ANDATACO of
California. Although as a legal matter the Merger resulted in ANDATACO of
California becoming a wholly-owned subsidiary of ADT, for financial reporting
purposes the Merger was treated as a recapitalization of ANDATACO of California
and an acquisition of ADT by ANDATACO of California (reverse acquisition). The
financial reporting requirements of the Securities and Exchange Commission
require that the financial statements reported by ADT subsequent to the Merger
be those of ANDATACO of California, which include the results of operations of
ADT from the Closing Date.
The acquisition of ADT by ANDATACO of California 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 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 had been established. As required by generally
accepted accounting principles, the amount allocated to in-process research and
development was recorded as a one-time charge to operations and the amount
allocated to existing technology was amortized over its estimated useful life.
The excess of the purchase price over the identifiable net assets acquired of
$8,362,000 was recorded as goodwill and is being amortized on a straight-line
basis over its estimated useful life of five years.
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ANDATACO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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NOTE 4 - NET LOSS PER SHARE
Basic and diluted net income per share have been computed under the guidelines
of Statement of Financial Accounting Standard (FAS) No.128, "Earnings Per
Share." Basic earnings per share ("EPS") is calculated by dividing the income
available to common shareholders by the weighted average number of common shares
outstanding for the period, without consideration for common stock equivalents.
Diluted EPS is computed by dividing the income available to common shareholders
by the weighted average number of common shares outstanding for the period in
addition to the weighted average number of common stock equivalents outstanding
for the period. Net income remains the same for the calculations of basic EPS
and diluted EPS. The Company has restated EPS for prior periods concurrent with
the adoption of FAS 128. The number of shares of the Company's common stock
outstanding immediately before the Merger has been treated as having been issued
at the Merger date. Shares issuable upon exercise of outstanding stock options
of 2,184,428 have been excluded from the diluted EPS computation, as their
effect would be antidilutive.
NOTE 5 - INVENTORIES
JULY 31, OCTOBER 31,
1998 1997
(Unaudited)
Inventories are comprised of the following:
Purchased components $4,226,000 $5,541,000
Work in progress 182,000 125,000
Finished goods 551,000 1,792,000
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$4,959,000 $7,458,000
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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the unaudited
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.
This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking
statements usually contain the words "estimate," "anticipate," "expect" or
similar expressions. All forward-looking statements are inherently uncertain as
they are based on various expectations and assumptions concerning future events
and they are subject to numerous known and unknown risks and uncertainties. The
forward-looking statements included herein are based on current expectations and
entail risks and uncertainties such as those set forth below and in the
Company's Form 10-K which could cause the Company's actual results to differ
materially from those projected in the forward-looking statements. The Company
disclaims any obligation to update or publicly announce revisions to any such
statements to reflect future events or developments.
OVERVIEW
ADT designs, manufactures, and distributes storage solutions based on its
Application-Specific Architecture ("ASA") for Windows NT and UNIX environments.
The Company develops products to meet the individual performance and
availability profiles of storage-intensive applications in its target markets.
The Company's open-architecture solutions include Redundant Array of Independent
Disks ("RAID") and RAID-ready disk arrays; tape backup and restore products; and
web storage management and other storage management utilities, remote mirroring
and disaster recovery software. These products support multiple server
platforms, including Sun Microsystems, Hewlett-Packard, Silicon Graphics, Inc.
and various NT systems. The Company distributes internally developed products,
as well as products from other manufacturers through direct, indirect and
original equipment manufacturer ("OEM") sales and service channels throughout
the world. The Company backs its products with maintenance and technical
support. In addition, it provides customized consulting service programs.
The GigaRAID Series is a family of RAID and RAID-ready disk and tape storage
systems that combine with the Company's proprietary, award-winning modular
packaging architecture, Enterprise Storage Packaging ("ESP"), to create complete
storage solutions. The GigaRAID/HA provides high performance and availability
for OLTP/Database applications characterized by small block/random data
processing. The GigaRAID/FT, is fully redundant and configurable for either
large block, sequential applications, or small block, random applications. In
the second quarter of fiscal 1998 the GigaRAID/FC Series, one of the first
storage systems to provide the availability, performance and connectivity
advantages of Fibre Channel technology, was introduced. Other GigaRAID Series
products, including the GigaRAID/SX, offer high performance and availability for
certain data warehouse, seismic processing and video applications characterized
by large block, sequential processing. In August 1998, the Company announced
three new storage products: an enhanced version of the GigaRAID/HA; the
GigaRAID/AA which is the next generation of the GigaRAID/SX; and the GigaRAID
8000 LVD enclosure, featuring Ultra2 SCSI Low Voltage Differential (LVD)
interface technology. The Company also introduced in August 1998 two storage
management software products, Client/S for the GigaRAID/HA, and Web Storage
Manager for the GigaRAID/AA.
Historically, the reseller business or the sale of third party non-GigaRAID
products accounted for the majority of the Company's revenues, representing 100%
of revenues in fiscal 1995 and declining to 37.2% and 34.6% in fiscal 1996 and
1997, respectively. The Company plans to continue to sell third party products
and to focus increased resources on the design, development, manufacturing and
marketing of internally developed and GigaRAID products. For the nine months
ended July 31, 1998 and 1997, revenue
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from sales of internally developed and GigaRAID products represented 59.2% and
42.6% of total revenue, respectively.
RESULTS OF OPERATIONS
The following table sets forth items in the Company's statement of operations as
a percentage of net sales for the periods presented. The data has been derived
from the unaudited condensed consolidated financial statements.
Three Months Ended Nine Months Ended
July 31, July 31,
---------------------- ----------------------
1998 1997 1998 1997
------ ------ ------ ------
Sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 74.5 77.8 70.2 77.6
------ ------ ------ ------
Gross profit 25.5 22.2 29.8 22.4
Operating expenses:
Selling, general and administrative 31.1 27.2 29.7 22.7
Rent expense to shareholder 0.5 0.4 0.4 0.4
Purchased research and development -- 10.9 -- 3.5
Research and development 3.3 1.4 2.5 1.3
------ ------ ------ ------
Total operating expenses 34.9 39.9 32.6 27.9
------ ------ ------ ------
Loss from operations (9.4) (17.7) (2.8) (5.5)
Interest expense 1.5 1.2 1.3 1.2
------ ------ ------ ------
Net loss (10.9)% (18.9)% (4.1)% (6.7)%
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Results of Operations - Third Quarter of Fiscal 1998 compared to Third Quarter
of Fiscal 1997
Sales. Sales for the three months ended July 31, 1998 were $17,092,000, a
decrease of 22.5% from sales of $22,057,000 for the same period in the prior
year. The decrease was primarily attributable to a decrease in sales of older
mass storage products including RAID Lite, RAPID-Tape, JBOD Disk and JBOT Tape,
as well as lower sales in non-GigaRAID distribution products. Mass storage
product sales were $970,000 in the third quarter of fiscal 1998 compared to
$3,747,000 in the third quarter of fiscal 1997. Non-GigaRAID distribution
product sales were $4,252,000 in the third quarter of fiscal 1998 compared to
$7,079,000 in the same period in 1997. The decrease in older mass storage and
non-GigaRAID distribution product sales is in line with the Company's strategy
to focus increased resources on newer GigaRAID products which produce higher
margins. However, GigaRAID product sales in the third quarter of fiscal 1998
remained relatively flat compared to sales in the third quarter of fiscal 1997.
The lower than expected sales of GigaRAID products, in the third quarter of
fiscal 1998 was a direct result of a slower than anticipated ramp in the
Company's Fibre Channel solutions offering including GigaRAID/FT and
GigaRAID/FC.
Gross Profit. Gross profit in the third quarter of fiscal 1998 was $4,359,000,
representing approximately 25.5% of revenues, compared to $4,906,000 in the
third quarter of fiscal 1997, representing approximately 22.2% of sales. The
increase in gross profit percentage was due primarily to the shift in product
mix from the third quarter of fiscal 1998 compared to the third quarter of
fiscal 1997. The Company's GigaRAID product family sales accounted for 62.6% of
revenues for the third quarter of fiscal 1998 as compared to 48.9% of revenues
in the third quarter of fiscal 1997. The Company's GigaRAID product family has a
higher average gross margin as compared to non-GigaRAID mass storage and third
party products. In addition, there was a reduction in costs of components used
to manufacture products in the third quarter of fiscal 1998 compared to the
third quarter of fiscal 1997.
Selling, General and Administrative. Selling, general and administrative
("SG&A") expenses 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 (i.e. goodwill amortization). SG&A expenses were
$5,325,000 and $6,015,000 for the three months ended July 31, 1998 and 1997,
respectively. The decrease in the current period's SG&A expenses over such
expenses incurred in the comparable period of the prior fiscal year primarily
represents the reduction in salesforce expenses, bad debt charges, and reduced
administrative expenses related to headcount reductions. Merger related expenses
for the periods include goodwill amortization of $418,000 and $278,000 included
in the third quarter of fiscal 1998 and 1997, respectively, and amortization of
proprietary technology of $200,000 in the third quarter of fiscal 1997.
Research and Development. Research and development expenses consist primarily of
salaries, employee benefits, overhead and outside contractors. Such expenses
were $568,000 and $304,000 for the quarters ended July 31, 1998 and 1997,
respectively. The level of research and development expenses 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.
Results of Operations - First Nine Months of Fiscal 1998 compared to First Nine
Months of Fiscal 1997
Sales. Sales for the nine months ended July 31, 1998 were $59,848,000, a
decrease of 13.4% from sales of $69,094,000 for the same period in the prior
year. The decrease was primarily attributable to a decrease in sales of older
mass storage products including RAID Lite, RAPID-Tape, JBOD Disk and JBOT Tape,
as well as lower sales in non-GigaRAID distribution products. Mass storage
product sales were $4,062,000 in the first nine months of fiscal 1998 compared
to $16,459,000 in the first nine months of fiscal 1997. Non-GigaRAID
distribution product sales decreased by $4,973,000 to $17,029,000 in the first
nine months of fiscal 1998 compared to $22,002,000 in the first nine months of
fiscal 1997. Although the Company experienced an increase in sales of internally
designed and distribution GigaRAID products of $6,006,000 over the same period
in 1997, such increase was more than offset by the decrease in the sales of
non-
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GigaRAID mass storage and third-party products. The decrease in non-GigaRAID
mass storage and third-party product sales is in line with the Company's
strategy to focus increased resources on internally designed products, including
the GigaRAID product family, capable of producing higher margins. This is
consistent with the Company's transition towards "owned solutions" - strategic
technologies designed in-house to create technical, time-to-market and gross
margin advantages. By combining engineered technology with selected products
manufactured by its distribution and development partners, the Company provides
a strong, sophisticated product line targeted to fast-growing segments of the
open systems storage market.
Gross Profit. Notwithstanding the decline in sales, gross profit for the first
nine months of fiscal year 1998 was $17,815,000, representing approximately
29.8% of revenues, compared to $15,485,000 in the first nine months of fiscal
1997, representing approximately 22.4% of sales. The increase in gross profit
percentage was due primarily to the shift in product mix from period to period.
The Company's GigaRAID product family sales accounted for 59.2% of revenues for
the first nine months of fiscal 1998 as compared to 42.6% of revenues in the
first nine months of fiscal 1997. The Company's GigaRAID product family has a
higher average gross margin as compared to non-GigaRAID mass storage and third
party products. In addition, there was a reduction in costs of components used
to manufacture products in the first nine months of fiscal 1998 compared to the
comparable period in fiscal 1997.
Selling, General and Administrative. SG&A expenses were $17,788,000 and
$15,690,000 for the nine months ended July 31, 1998 and 1997, respectively. The
increase in the current period's SG&A expenses over such expenses incurred in
the comparable period of the prior fiscal year is primarily due to an increase
of $975,000 of goodwill amortization, an increase in depreciation expense of
approximately $653,000 related to the addition of fixed assets from the Merger,
and the addition of key sales executives and management personnel in the current
period.
Research and Development. Research and development expenses were $1,482,000 and
$918,000 for the nine months ended July 31, 1998 and 1997, respectively. The
level of research and development expenses 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.
Interest Expense. The decrease in interest expense of $73,000, or 14.6%, in the
first nine months of fiscal 1998 over the comparable period in fiscal 1997 is
primarily due to the reduction in the outstanding portion of the Company's bank
line of credit.
LIQUIDITY AND CAPITAL RESOURCES
During the first nine months of fiscal 1998, the Company generated $3,218,000 of
cash from operating activities, primarily from improved management of working
capital. Included in this net change was a decrease of $2,499,000 in
inventories, and a reduction in trade accounts receivable of $2,494,000,
partially offset by a reduction of accrued expenses of $1,528,000. Offsetting
cash generated from operations was the reduction in the outstanding portion of
the Company's bank line of credit of $1,500,000 and payments for purchases of
capital equipment of $1,298,000.
On April 30, 1998, the Company obtained a credit facility with a new financial
institution. The new credit facility permits the Company to borrow the lesser of
$15,000,000 or a percentage of eligible accounts receivable and inventory
($6,239,000 available at July 31, 1998). As of July 31, 1998, the Company had
$5,000,000 outstanding under this credit line. The credit facility expires on
April 30, 2001; consequently, borrowings under this line have been classified as
long term.
The shareholder loan to the president and principal shareholder is unsecured,
due in June 2004, with interest payable monthly at 9 percent per annum. This
loan is subordinated to the bank line of credit.
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The Company is currently satisfying all working capital and capital expenditure
requirements through internally generated cash flows from operations 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
Prior to the consummation of the Merger, ANDATACO of California 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.
Concurrent with the Merger, ANDATACO of California changed its taxpayer status
from a Subchapter S Corporation to a Subchapter C Corporation. 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, 1998 includes losses solely incurred by the Company since
the Merger.
Because of the change in taxpayer status to a Subchapter C Corporation, the
Company is subject to federal and state income taxes. The tax provision is
calculated giving effect to the change of ANDATACO of California from a
Subchapter S Corporation to a Subchapter C Corporation, and the resultant
adjustments for federal and state income taxes, as if ANDATACO of California had
been taxed as a C Corporation rather than an S Corporation since inception. 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.
No income tax provision or benefit was recorded for the nine-month period ended
July 31, 1998 due to the net loss incurred during this period, which loss has
not resulted in the recording of an income tax benefit due to a full valuation
allowance also being recorded.
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, which losses have not resulted in the recording of an income
tax benefit due to a full valuation allowance also being recorded.
YEAR 2000
Many current computer systems and software products were not designed to handle
any dates beyond the year 1999. As a result, computer systems and/or software
used by many companies may need to be modified prior to the Year 2000 in order
to remain functional. Significant uncertainty exists in the hardware and
software industry concerning the potential effects associated with such
compliance.
In mid-1997, the Company formed an internal task force to evaluate those areas
of the Company that may be affected by the Year 2000 problem and devised a plan
for the Company to become Year 2000 compliant in a timely manner (the "Plan").
The Plan focuses on three major areas; the Company's internal business
transaction systems; the products the Company sells and the business transaction
systems of its business partners, including suppliers, customers and bankers. To
date, the Company has executed approximately two-thirds of its Plan and
anticipates completing the remaining portions of the Plan by the end of calendar
year 1998 while the evaluation and testing of certain ancillary PC office and
specialized PC applications will continue through 1999.
Internal Business Transaction Systems
The Company has completed a review of its critical business transaction systems,
and its Year 2000 compliance related to business transaction systems is as
follows:
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All of the Company's systems for processing business transactions are Year 2000
compliant and the Company expects that these systems will correctly process
transactions prior to and following 12:00am January 1, 2000. This compliance
extends to the underlying hardware, operating systems, and other software on
which the Company's business system operates. This compliance includes the
following transactions and related printed documents: accepting orders from
customers, fulfilling customer orders, invoicing customers, crediting customer
accounts, applying customer payments, refunding customers, placing orders with
vendors, receiving vendor shipments, processing vendor invoices, and paying
vendors.
The Company is in the process of evaluating certain ancillary PC office
applications (e.g. word processing, spreadsheets, e-mail etc.) and specialized
PC applications including art, drawing and other creative department
applications, hardware design and other engineering department applications,
software development systems, bank account management, fixed asset management,
and stock option database management. This effort will continue through 1999.
The Company has incurred to date no incremental material costs associated with
its efforts to become Year 2000 compliant, as the majority of the costs have
occurred as a result of normal upgrade procedures. Based on current information,
the Company does not expect future costs to modify its information technology
infrastructure to be material to its financial condition or results of
operations. However, there can be no assurances that there will not be
interruptions or other limitations of financial and operating systems
functionally or that the Company will not incur significant costs to avoid such
interruptions or limitations.
Products the Company Sells
The Company has also completed a review of its manufactured product line.
However, the Company is still in the process of evaluating third party products
and software sold by ADT for Year 2000 compliance. The Company's Year 2000
compliance related to the products it sells is as follows:
All ADT manufactured products are Year 2000 compliant and the Company believes
these manufactured products will not produce date errors in changing from the
year 1999 to 2000. The functionality of all of the Company's manufactured
products, however, are dependent on the software compliance of the underlying
operating systems.
All ADT developed software products are Year 2000 compliant.
The Company is still in the process of evaluating third party products and
software sold by ADT for Year 2000 compliance. In the event that any of the
significant third party products and software sold by ADT do not successfully
achieve Year 2000 compliance on a timely basis, the Company's business or
operations could be adversely affected.
The Company's Business Partners
The Company's suppliers (particularly sole-source and long lead-time suppliers),
key customers and other key business partners (e.g. bankers) may be adversely
affected by their respective failure to address the Year 2000 problem. Should
any of the Company's suppliers encounter Year 2000 problems that cause them to
delay manufacturing or shipments of key components to ADT, the Company may be
forced to delay or cancel shipments of its products, which would have a material
adverse effect on the Company's results of operations. Any inability of ADT's
key customers to become Year 2000 compliant which would cause them to delay or
cancel substantial purchase orders or delivery of ADT's products would also have
a material adverse effect on the Company's results of operations. Additionally,
any inability of the Company's other key business partners, including the
Company's bank, to become Year 2000 compliant could cause them to become unable
to provide critical business services, such as to provide funding on the
Company's line of credit, and could therefore also have a material adverse
effect on the Company.
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The Company is currently in the process of identifying key customers, vendors
and other significant business partners (e.g. bankers) and obtaining Year 2000
compliance statements. The Company anticipates completion of this effort by the
end of 1998; however, there can be no assurances that any such efforts will be
successful.
The Company has incurred to date no incremental material costs associated with
the Year 2000 issue. Based on current information, the Company does not expect
future costs to execute the remainder of its Year 2000 compliance plan to be
material to its financial condition or results of operations. However, there can
be no assurances that there will not be interruptions or other limitations of
financial and operating systems functionally or that the Company will not incur
significant costs to avoid such interruptions or limitations.
Costs incurred relating to the Year 2000 issue will be expensed by the Company
during the period in which they are incurred. The Company's expectations about
future costs associated with the Year 2000 issue are subject to uncertainties
that could cause actual results to have a greater financial impact than
currently anticipated. Factors that could influence the amount and timing of
future costs include but are not limited to the success of the Company's
customers and suppliers in addressing the Year 2000 issue.
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PART II - OTHER INFORMATION
ITEM 5: OTHER INFORMATION
On August 11, 1998 the Company received correspondence from The Nasdaq
Stock Market notifying the Company of its intention to delist the Company's
common stock, effective with the close of business on August 18, 1998, on
account of the Company no longer meeting the Nasdaq SmallCap Market's
continuing listing requirements for net tangible assets and market
capitalization. On August 17, 1998 the Company requested a hearing to
appeal this proposed action. Pursuant to Nasdaq rules, the request for a
hearing has postponed the proposed delisting of the Compnay until Nasdaq
has had an opportunity to hear and consider the appeal.
As of September 11, 1998, no hearing date has been set by Nasdaq.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
10.1 Amendment No. 1 to Loan Agreement dated as of July 29, 1998
between Wells Fargo Bank and the Company.
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Andataco, Inc.
Date: September 14, 1998 By: /s/ Harris Ravine
---------------------------------------
Harris Ravine
Chief Executive Officer
(on behalf of registrant and as
its principal executive officer)
Date: September 14, 1998 By: /s/ Diane Wong
---------------------------------------
Diane Wong
Vice President and Corporate Controller
(on behalf of registrant and as
its principal financial officer)
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