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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ------- AND EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
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: 08354
nStor Technologies, Inc.
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(exact name of registrant as specified in its charter)
Delaware 95-2094565
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(State of Incorporation) (I.R.S. Employer ID No.)
10140 Mesa Rim Road, San Diego, California 92121
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(Address of principal executive offices)
Registrant's telephone number, including area code: 858-453-9191
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- ---------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.05 per share
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(Title of class)
Indicate by 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 period 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
----- -----
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AGGREGATE MARKET VALUE OF THE VOTING COMMON STOCK
HELD BY NONAFFILIATES OF THE REGISTRANT
Common Stock, par value $.05 per share (Common Stock), was the only class of
voting common equity of the Registrant outstanding on December 31, 2000. Based
on the last sales price of the Common Stock on the American Stock Exchange
(AMEX) on March 30, 2001 ($ .79), the aggregate market value of the
approximately 21,854,000 shares of the voting Common Stock held by
non-affiliates was approximately $17.3 million.
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the Registrant has filed all documents and
reports required to be filed by Section 12, 13, or 14(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes ____ No ____
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date:
35,478,489 shares of Common Stock, par value $.05 per
share, were outstanding as of April 16, 2001.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Definitive Proxy Statement of nStor Technologies, Inc.
for the 2001 Annual Meeting of Stockholders
(incorporated in Part III)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.[ ]
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PART I
Item 1. Business
GENERAL
nStor Technologies, Inc. is a manufacturer and supplier of highly integrated
enterprise-class storage solutions for computing operations including external
RAID (Redundant Array of Independent Disks) solutions, a complete set of SCSI
(Small Computer Systems Interface), tape backup and advanced storage management
software solutions. We incorporated as a Delaware corporation in 1959 and
initially acquired our computer storage business in 1996. References in this
Form 10-K to "we", "our", "us", the "Company", and "nStor" refer to nStor
Technologies, Inc. and its consolidated subsidiaries.
Our product line supports a variety of operating systems, including Windows NT
and Windows 2K, Novell NetWare, IBM OS/2, Mac, SCO UNIX, UnixWare, SGI IRIX, Sun
Solaris, and Linux, and utilizes technology architectures such as Fibre Channel,
Ultra2 LVD (Low Voltage Differential), SCSI, Ultra SCSI, and Ultra160 SCSI. Our
RAID solutions provide data storage solutions, particularly for
storage-intensive environments such as the Internet and mission-critical
applications requiring substantial storage performance and capacity, such as
document imaging, video and multimedia, or transaction-intensive environments,
such as banking and order entry systems.
We market our products through a direct sales force in the United States and
through a global network of resellers and Original Equipment Manufacturer (OEM)
partners. With company-owned operations in the United States and Asia, and
strategic partners in Europe and Australia, we believe we are well positioned to
meet the demanding storage requirements of our global customers.
SIGNIFICANT AND RECENT EVENTS
Significant events during 2000 and through April 16,2001 include the following:
o In January 2000, Larry Hemmerich, a computer storage industry veteran,
became our President and Chief Executive Officer. Substantially all of the
members of our current executive management team were subsequently
recruited by Mr. Hemmerich.
o In January 2000, we sold all of the assets of our Borg Adaptive
Technologies subsidiary (Borg) for net cash proceeds of $7 million.
o In January 2000, we acquired substantially all the assets of OneofUs
Company Limited (OneofUs), a Taiwan-based designer of high performance
fibre channel controllers and storage solutions for the open systems
market, for an aggregate purchase price of $2,850,000, principally
consisting of shares of our common stock.
o During the first quarter of 2000, we completed the relocation of our Lake
Mary, Florida manufacturing operations to San Diego, California.
o Beginning in the second half of 2000, we began to transition our older
legacy products to our newer, state-of-the-art technology solutions,
centered on our NexStor 2U (3.5-inches high) storage enclosures and RAID
systems designed to hold up to twelve 1-inch disks.
o During January 2001, we reduced our overall workforce in connection with
the restructuring of our sales and marketing efforts to focus on the
potential sales growth in the OEM and Channel business. Since October 2000,
we have signed agreements with various new OEM's, Value-Added Resellers
(VARs) or system integrators.
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o Between January 1, 2000 and March 27, 2001, we received cash proceeds of
$4.4 million from private investors in the form of debt and equity
financing.
o Effective April 12, 2001, holders of all of our long-term notes payable
totaling $11.9 million as of that date, have verbally agreed to exchange
their notes for $11.9 million of convertible preferred stock.
For a more detailed discussion of these developments, please see Management's
Discussion and Analysis of Financial Condition and Results of Operations.
Our executive and business headquarters are located at 10140 Mesa Rim Road, San
Diego, California 92121 and our telephone number is (858) 453-9191. Our
principal engineering offices are located in Lake Mary, Florida. Information
regarding nStor can be accessed through the World Wide Web at http://
www.nStor.com.
INDUSTRY
The demand for increased information and storage capacity has grown
dramatically. A significant growth in Internet users has resulted in the
creation of millions of new web sites. Environments that have traditionally been
paper-intensive such as insurance, healthcare, education, law institutions, and
government agencies have embraced the use of document imaging technology.
Specific sectors such as broadcasting, entertainment, music, and animation have
now fully transitioned their operations to the digital realm. This exponential
growth of computerized data has accelerated the need for available and reliable
data storage solutions. To meet this need, companies are investing in new
centralized storage infrastructures that not only meet their demands today, but
also lay the groundwork for their future needs.
As corporate Information Technology (IT) environments increase their
server-based infrastructure to include storage-centric solutions, the areas of
fault-tolerance and storage management play a vital role in protecting
businesses critical data. To meet this escalating demand, storage suppliers are
transitioning their RAID solutions into Storage Area Networks (SAN) and Network
Attached Storage (NAS) environments, the two fastest growing sectors in the
marketplace. To successfully compete in this aggressive market, companies need
innovative products, strong integration expertise, and excellent support
services.
According to International Data Corporation (IDC), a leading provider of
technology intelligence, industry analysis and market data, total spending on
disk storage will reach $53.3 billion by 2004 with over $35 billion, or
approximately 67%, consisting of SAN and NAS based revenues. This represents
exceptionally strong growth when comparing the $2.9 billion in SAN and NAS
revenue realized in 1999, or the $6.7 billion realized in 2000, a year over year
increase of 136%. The RAID solutions market is growing at a rapid rate with
total revenues of $21.5 billion in 2000, an increase of 28% from 1999. In light
of these historical numbers and the resulting estimated growth rates in SAN and
NAS revenues for the next four-years, the overall storage sector is poised for
substantial growth.
WHAT IS RAID TECHNOLOGY?
Developed in 1988 by a team of researchers from the University of California at
Berkeley, RAID is an information storage technology consisting of three or more
disk drives working together as one. Through the use of proprietary hardware and
software, RAID configurations achieve extremely fast data transfer speeds, high
input/output (I/O) rates, and incorporate distinctive levels of redundancy to
protect large pools of data.
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RAID storage solutions outperform individual disk solutions because of their
ability to simultaneously spread and retrieve data among multiple, high speed
disk drives. The popularity of RAID-based storage solutions is not only derived
from increased performance, but also increased data protection. Typical RAID
solutions incorporate data replication, dual sets of components, and advanced
cooling systems. Should any aspect of the RAID solution fail, whether it is a
disk drive, controller, or power supply, it can quickly and efficiently be
"hot-swapped" with a replacement component without interrupting user operability
or data security.
We believe that RAID subsystems will continue to be the preferred method of data
storage in networked environments. As corporations transition from direct
attached storage solutions to a centralized solution, we see our current and
emerging RAID products as highly applicable to the challenges faced by multiple
industries. We believe our NexStor Fibre product line and the NexStor SCSI
product line currently under development are well-positioned to provide
fault-tolerant storage systems to many segments of the market, allowing us to
participate in the growth in the RAID solutions market. However, there can be no
assurance that we will be successful in these efforts due to the possibility of
increased competition, the development of alternative technologies, and other
factors.
PRODUCT STRATEGY
During 2000, we completed our transition from older product designs to our new
NexStor 3000 2U (3.5 inches) product line which we believe continues to lead the
industry in terms of rack space density. The new product line is offered for
Fibre Channel, SCSI, and Fibre-to-SCSI environments. These storage solutions
feature fully redundant, hot-swappable components and support for the industry's
fastest 10,000 and 15,000 RPM (resolutions per minute) disk drives. The
NexStor's advanced design and capability are targeted to the mid-range to
enterprise computing environment. The NexStor products designed by us include
SES-compliant (SCSI Enclosure Services) modules that can store up to 584
Gigabytes (GB) of data in a 3.5 inch, or 2U increment of rack space. With the
anticipated arrival of new disk drive technology later this year, we expect to
expand this capacity to 1.44 Terabytes (TB) in that same amount of space.
Our current hardware products include SAN-ready Fibre RAID and RAID-ready Fibre
JBOD (just a bunch of disks) storage solutions. In October 2000, the NexStor
Fibre product line was expanded to include a 12-bay module featuring increased
spindle count that enhances throughput performance. During that same month, we
also announced the newly developed 802S SCSI storage solution. We plan further
development of our SCSI product line and anticipate adding 8-bay and 12-bay SCSI
RAID solutions as well as a 12-bay JBOD module to round out our NexStor SCSI
product line.
To compliment our NexStor product line, our software team released a new version
of our AdminiStor software in March 2000. The new AdminiStor is a web-based
storage management software suite that is used to configure RAID controllers,
monitor and report storage status, and manage disk arrays. AdminiStor provides
local or remote monitoring and management with remote notification (e-mail
alerts to individuals, groups or pagers) for both Windows and Unix environments,
allowing users to manage data from anywhere in the world.
CURRENT PRODUCT OFFERING
NexStor 3150/3250 and 802F / 1202F - Fibre Channel RAID
Flagship Fibre Channel products include the SAN-ready 3150 and 3250 complimented
by the RAID-ready 802F and 1202F. The NexStor 3150 is an 8-bay module, designed
to meet high capacity needs while fitting into a small space. It connects up to
fifteen 802F JBOD modules behind a single set of RAID controllers, scaling up to
9.1 TB of storage within 56 inches of space. With the anticipated introduction
of new disk drive technology later this year, the maximum capacity will increase
to 22.3 TB within the same 56 inches. The NexStor 3150 and 802F product series
is targeted at sectors such as data warehousing and seismic analysis.
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The NexStor 3250 is the newly introduced 12-bay module, accommodating up to
twelve 1-inch drives and offering higher performance through increased spindle
count. It scales up to 432 GB in 3.5 inch increments and provides 33% more disk
drives in the same space as the 8-bay series. The NexStor 3250 can connect up to
seven additional 1202F JBOD modules behind a single set of RAID controllers,
reaching a maximum capacity of 3.5 TB of storage within 28 inches of space. The
NexStor 3250 and 1202F are designed for intense I/O applications that prioritize
performance over capacity such as Online Transaction Processing (OLTP), database
and video editing.
NexStor 802S/1202S - SCSI JBOD (RAID-ready)
The NexStor 802S is our first Ultra 160 JBOD product and serves as the
foundation for future RAID and 12-bay Ultra SCSI designs. It accommodates up to
eight 1.6 or 1-inch drives and offers up to 584 GB of data storage. As mentioned
previously, we anticipate expanding the NexStor SCSI family to include complete
SCSI RAID solutions in both the 8-bay and 12-bay modules. With a large part of
the storage market still using SCSI, the NexStor 802S and 1202S fill a
direct-connect SCSI requirement still in demand by many IT environments. This
product line is focused on providing high-performance, workgroup solutions with
an entry-level price point.
AdminiStor
AdminiStor Plus is the latest version of our storage solution management
software. It is JAVA-based and provides heterogeneous support for multiple
platforms. Through the use of AdminiStor, storage systems up to and including
SAN architecture can be managed from any point in the world utilizing a standard
web-connection. Offering different levels of security, AdminiStor allows
administrators to define who will be able to view the configuration, change
parts of the configuration, or have complete authority over their storage
subsystem.
Backup Tape Solutions
We offer our clients a range of tape backup systems to compliment our primary
storage solutions. Included in this range are the newly introduced Linear Tape
Open (LTO) and Super Digital Linear Tape (SDLT) technologies.
Technical Service
We continue to offer a range of full-time service and support programs,
providing customers with a variety of on-site and help-desk support services. We
offer five days a week, nine hours a day (5x9) or seven days a week, 24 hours a
day (7x24), as well as next day depot replacement. During 2000, we also expanded
our service organization to include a Professional Services department that
focuses on subsystem storage integration with existing infrastructures.
SAN Solutions
As an alternative to server-attached storage, networked storage architectures
have been gaining popularity. In fact, some industry analysts estimate that more
than 80% of the world's external storage will be SAN-attached by 2003. This is
because SANs provide the scalability, accessibility, and manageability to
satisfy present and future business computing requirements.
We continue to develop, test, and install high availability SAN storage
solutions. In addition to our SAN-ready Fibre products, we also offer pre-tested
and certified switches and routers necessary for a complete SAN architecture. We
expect our new NexStor product line to further strengthen our ability to provide
clients with complete, high performance, and price-competitive SAN solutions.
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As storage needs continues to grow, the physical space required to hold racks of
storage systems becomes a premium. We believe our focus on providing
space-sensitive, high capability, and fully integrated SAN solutions will help
us compete successfully in this growing market. We also believe the addition of
our Professional Services department and the enhanced SAN capability now
included in our AdminiStor software, further extends our SAN installation and
integration capabilities. However, there can be no assurance that we will be
successful in these efforts due to the possibility of increased competition, the
development or advancement of alternative technologies, and other factors.
PROPRIETARY TECHNOLOGY
We rely upon patents, copyright and trademark protection, as well as
non-disclosure and confidentiality agreements with employees and customers, to
establish, protect and preserve our proprietary rights. We own registered
trademarks or copyrights for AdminiStor, GigaRAID, Enterprise Storage Packaging,
RAID Lite, Rapid-Tape, StorView, Andataco, WEB STORAGE MANAGER, and "for the
life of your data". We have trademarks pending on the following: GigaSTOR,
Estorage, SANStor, and SAN-SATIONAL. In addition, we have patents pending on
data storage chassis with adaptable rack monitoring and disk drive storage
enclosures with isolated cooling paths for storage media. For a discussion of
certain risks relating to the protection of our intellectual property rights,
see Risk - Factors - Potential Infringement of Intellectual Property Rights.
SALES AND MARKETING
We market our products and services through a direct sales force to users in the
United States and through a global network of reseller and OEM partners in
Europe, northern Asia, Pacific Rim and Australia. We sell our products directly
to end users through our field sales organization and indirectly through OEMs
and volume channels such as Systems Integrators and Value Added Resellers
(VARs).
Our direct product sales to end users through our field sales organization was
our primary sales channel in 2000 and 1999, representing approximately 75% of
total sales during both years. Service contracts, principally with end users,
represented 11% and 6% during 2000 and 1999, respectively. Our direct sales
organization, including the supporting system engineers, is arranged by specific
geographical territories, based on our primary revenue opportunities. To
maximize our visibility within each territory, the regional manager, sales
representatives and sales engineers are located in the respective territories.
No direct sales customer accounted for more than 10% of net sales during 2000.
In 1999, one direct sales customer, Intel, accounted for 11% of net sales.
OEM-grade products are primarily sold directly to OEM server manufacturers for
integration into their product offerings. Generally, the OEM products are
labeled under the OEM's brand name where our products are frequently packaged as
part of a complete data processing system or combined with other storage devices
to deliver a storage subsystem. We believe the OEM channel sales provides
significant revenue opportunity, market visibility and credibility, and can
serve as a proving ground for new technologies that can later be marketed and
sold in the distribution channel. OEM's are strategic in nature and, therefore,
require unique sales strategies. The sales and support organization must be
highly technical and generally involves several corporate resources.
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Sales to OEMs and other indirect sales accounted for 14% and 19% of our sales
for 2000 and 1999, respectively. No indirect customer accounted for more than
10% of net sales in 2000. In 1999, one OEM customer, Silicon Graphics (SGI),
accounted for 15% of net sales.
The sales model for product distribution in Europe and the Asia/Pacific-Rim is
similar to the domestic OEM and Reseller channel model, utilizing Systems
Integrators, technical distributors and VARs. Complementary pricing and margin
structures and marketing programs support each sales channel. We believe this
strategy allows us and our customers to effectively sell and market our products
to their specific marketplace while maintaining channel integrity.
Our marketing plan utilizes a variety of programs to promote and develop new and
expanding markets for our product lines and to support our sales strategy. The
focal points of this plan include the supply of highly focused promotional
material including product specification literature and application notes, web
site innovation, development and promotion of the distribution channel,
strategic media placement, active regional, national and international tradeshow
participation, and aggressive public relations.
TECHNICAL SUPPORT AND CUSTOMER SERVICE
We provide support from order entry to post- sales service through our
enterprise resource planning software. Products are tracked through each stage
of engineering, manufacturing and distribution for the entire life of a product,
and our customer service department can view the history of each individual
system.
We believe that our ability to provide prompt and reliable technical support has
enhanced our marketing efforts. We provide comprehensive customer and technical
support for all of our products through our technical and customer services
organization. A toll-free telephone number is provided for support to all OEM's,
volume channel partners (resellers and integrators) and end users.
Our standard warranty is a one-year return-to-factory policy, which covers both
parts and labor. We pass on to the customer the warranty provided by the
manufacturers for products that we distribute and for drives and tapes used in
our storage solutions. We have not experienced material warranty claims;
however, there can be no assurance that future warranty claims will not have a
material adverse effect on our future financial condition and operating results.
We also offer extended warranties (two, three and five years) and on-site
service for our products for a fee, including 24-hour service, seven days a week
or 9-hour service, five days a week, for which we contract primarily with
third-party service providers. In addition, we offer a Depot Express program for
certain of our products. Depot Express provides for advance replacement of
failed components. If our Help Desk technical staff determines a replacement is
necessary, we will ship a new component by the next business day, based upon
availability. This service is available for a one-time fee at the time of the
original purchase.
We also offer an Incident Depot Express program for certain of our products.
Incident Depot Express provides expedited shipment for failed components on a
per-incident basis, based upon availability. This is a non-contracted service
and does not require a charge at the time of the original purchase. A fee is
charged only if a component fails and a replacement is shipped out.
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MANUFACTURING AND SUPPLIERS
Our manufacturing operations are currently located in San Diego, California. Our
products are assembled from components and prefabricated parts, such as
controllers, cabinets, multiple disk drives and power supplies, manufactured and
supplied by others. We work closely with a group of regional, national and
international suppliers, which are carefully selected based on their ability to
provide quality parts and components that meet our specifications and volume
requirements. A number of our parts and components are not available off the
shelf, and are specifically designed by us for integration into our products.
We depend heavily on our suppliers to provide high quality materials on a timely
basis and at reasonable prices. Although many of the components for our products
are currently available from numerous sources at competitive prices, some of the
components used in our products are presently available from a limited number of
suppliers, or from a single supplier. Further, because of increased industry
demand for many of those components, their manufacturers may, from time to time,
be unable to make delivery of orders on a timely basis. In addition,
manufacturers of components on which we rely may choose, for numerous reasons,
not to continue to make those components, or the next generation of those
components, available to us. The inability to obtain a key product as needed may
cause a reduction in our sales volume.
We have no long-term supply contracts. There can be no assurance that we will be
able to obtain, on a timely basis, all of the components we require. If we
cannot obtain essential components as required, we could be unable to meet
demand for our products, thereby materially adversely affecting our operating
results and allowing competitors to gain market share. In addition, scarcity of
such components could result in cost increases which could adversely affect our
operating results.
The sophisticated nature of our products requires extensive testing by skilled
personnel. We utilize specialized testing equipment and maintain an internal
test-engineering group to provide this product support.
BACKLOG
We manufacture our products based on a forecast of near-term demand and maintain
inventory in advance of receipt of firm orders from customers. Shipments are
generally made shortly after receipt of a firm order. We have no long-term
purchase commitments from our customers and, in general, customers may cancel or
reschedule orders on 30 days notice with little or no penalty. As a result, our
backlog at any given time is not necessarily indicative of future sales levels.
There can be no assurance that orders from existing customers will continue at
their historical levels, that we will be able to obtain orders from new
customers, or that existing customers will not develop their own storage
solutions internally and as a result reduce or eliminate purchases. Loss of one
or more of our principal customers, or cancellation or rescheduling of material
orders already placed, could materially and adversely affect our operating
results.
RESEARCH AND DEVELOPMENT
We have three engineering centers to facilitate our product development. Each of
these centers of competency is focused on a different aspect of our product
development strategy.
Lake Mary, Florida is the competency center for our enclosure technology and
development. In addition to designing, developing and testing our storage
enclosures, engineers in Lake Mary are also responsible for the design,
development and successful integration of controllers (both nStor-developed
controllers as well as third-party products) into our enclosure technology.
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San Diego, California is the competency center for our integrated solutions
including an extensive SAN integration lab. Engineers in San Diego integrate the
total SAN and general storage solutions that include internally developed and
third party software and hardware components. The SAN interoperability lab
focuses on SAN component selection and validation, integration and delivery of
end-user solutions as well as solution testing for all our SAN-related products
and services.
Taipei, Taiwan is the competency center for the development of our RAID
controller technology and Fibre Channel drive firmware qualification for these
controllers.
The information storage industry is subject to rapid technological change. Our
ability to compete successfully is largely dependent upon the timely development
and introduction of products and our ability to anticipate and respond to
change. We use engineering design teams that work with marketing managers,
application engineers and customers to develop products and product
enhancements. Computer I/O interface standards are maintained and an extensive
disk drive qualification program is in place to monitor disk drives to ensure
the quality and performance of the disk drives integrated into our disk arrays.
As part of our development strategy, we actively seek industry leaders with whom
we can initiate co-development activities in the hardware, software and systems
businesses.
COMPETITION
The market for all levels of storage subsystems is subject to intense
competition. We compete not only with other disk array manufacturers, but also
with manufacturers of proprietary, integrated computer systems and system
integrators which sell computer systems containing general purpose RAID
subsystems, some of which may have significantly greater financial and
technological resources or larger distribution capabilities than we do.
Certain competitors may offer their products at lower sales prices than we do;
accordingly, we must often compete on the basis of product quality, performance
and reliability in specific applications. Our continued ability to compete will
largely depend upon our ability to continue to develop high performance products
at competitive prices while continuing to provide superior technical support and
customer service. For a discussion of certain of our major competitors, see Risk
Factors - Intense Competition.
EMPLOYEES
As of March 31, 2001, we employed 140 full-time employees, of which 49 were
involved in engineering, product development and technical support, 40 in sales
and marketing, 30 in manufacturing and operations, and 21 in finance, management
and administration. Our employees are not covered by collective bargaining
agreements and there have been no work stoppages. We believe our employee
relations are good.
We also believe that our future success will largely depend upon our ability to
continue to attract, employ and retain competent qualified technical, marketing
and management personnel. Experienced personnel are in great demand and we must
compete with other technology firms, some of which may offer more favorable
economic incentives to attract qualified personnel.
RISK FACTORS
In addition to the various risks ordinarily attendant to investments in entities
in the technology industry, certain other material risk factors relating to our
company and its business present a particularly high degree of risk. The
specific risks set forth below are not considered to or deemed to be exhaustive
or definitive of all the material risks involved in our company's business.
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Recent Losses; Capital Needs
We have experienced net losses for the fiscal years ended December 31, 2000,
1999 and 1998 of $21.9 million, $18.7 million and $10.4 million, respectively.
At December 31, 2000, we had an accumulated deficit of $80.8 million. There can
be no assurance that we will be able to achieve or maintain profitability on a
quarterly or annual basis or that we will be able to achieve revenue growth.
In late 1997, our management determined that amounts available under our bank
line of credit would not be sufficient to satisfy our cash requirements and
that, as a result, additional debt and/or equity financing would be necessary.
During the period beginning in late 1997 and ending on March 31, 2001, we
obtained approximately $36.1 million from private investors through the sale of
our convertible preferred stock and common stock, the issuance of subordinated
and other notes and the exercise of warrants and options to purchase shares of
our common stock. In May 2000, we entered into a Common Stock Purchase Agreement
with Wishmasters Limited. The agreement establishes an equity line of credit
wherein Wishmasters committed up to $15 million to purchase our common stock
over a twelve month period at a discount to the market price. Between May 2000
and March 2001, Wishmasters purchased 508,857 shares of our common stock for $1
million. On January 10, 2000, we sold substantially all of the assets of our
wholly-owned subsidiary, Borg Adaptive Technologies, for $7 million cash, net of
approximately $500,000 of transaction costs.
Inability to Comply with Financial Covenants
From time to time, prior to 2000, we were unable to comply with certain of the
financial covenants of our bank lines of credit and had requested that our
lenders forbear from exercising the remedies available to them under such
circumstances. In each such case, our bank agreed with our request.
During the first quarter of 2000, we were not in compliance with the minimum
tangible net worth covenant of our principal credit facility. On March 29, 2000,
the lender agreed to waive the default for both periods. Effective April 14,
2000, we agreed with the lender to amend certain terms of the credit facility
including an increase in the interest rate to prime plus 1.5% and new minimum
net worth and net income covenants on a consolidated basis. All other
significant provisions of the credit facility remain the same. The amended
agreement was executed on September 14, 2000. Since the fourth quarter of 2000,
we have not been in compliance with the new minimum net worth and net income
requirements and are in technical default under the compliance provisions of the
bank line of credit. We are currently in discussions with the lender to amend
the financial covenants; however, there can be no assurance that we will be
successful in amending the financial covenants or finding a replacement lender
who will provide financing to us on acceptable terms. If we are successful in
amending the financial covenants, there is no assurance that we will be able to
maintain compliance with these covenants in the future.
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Fluctuations in Operating Results
We have experienced significant period-to-period fluctuations in our operating
results. These fluctuations are due to product design, development,
manufacturing and marketing expenditures. If significant variations were to
occur between forecasts and actual orders with respect to our products, we may
not be able to reduce our expenses proportionately and operating results could
be adversely affected. Our revenues in any quarter are dependent on the timing
of product shipments, the status of competing product introductions, as well as
the availability from suppliers of component parts required for our products.
Like many other technology companies, a disproportionately large percentage of
quarterly sales often occur in the closing weeks of each quarter. Any
forward-looking statements about operating results made by members of our
management will be based on assumptions about the likelihood of closing
anticipated sales and other factors management considers reasonable based in
part on knowledge of performance in prior periods. The failure to consummate any
of those sales may have a disproportionately negative impact on our operating
results, given our relatively high fixed costs, and may thus prevent
management's projections from being realized.
Inability to Attract and Retain Qualified Employees
Our ability to provide high-quality products on a timely basis requires that we
employ an adequate number of skilled engineers and technicians. Accordingly, our
ability to increase our productivity and profitability will be limited by our
ability to attract and retain skilled personnel. We may not be able to maintain
an adequate skilled labor force necessary to operate efficiently and to support
our growth strategy and our labor expenses may increase as a result of a
shortage in the supply of skilled personnel.
New Line of Products
During 2001, we introduced a number of new products. We are continuing to
encourage our customers to move from our various legacy products to our new line
of products. These activities entail a number of risks and uncertainties, all of
which could have a material and adverse affect on our business. Those risks and
uncertainties, include, but are not limited to, the following:
o customer orders may be delayed while customers evaluate new products;
o the new line of products may contain unknown defects or bugs;
o customers may not purchase the new products; and
o it will be more difficult to accurately predict future sales and financial
performance.
Rapid Technological and Customer Preference Changes
The open systems data storage market in which we operate is characterized by
rapid technological change, frequent new product introductions and evolving
industry standards. Customer preferences in that market are difficult to predict
and changes in those preferences could render our current or future products
unmarketable. The introduction by our competitors of products embodying new
technologies and the emergence of new industry standards could render existing
products as well as new products being introduced obsolete and unmarketable. For
example, if customers were to turn away from open systems computing, our
revenues would decline dramatically.
Our success depends upon our ability to address the increasingly sophisticated
needs of customers, to enhance existing products and to develop and introduce,
on a timely basis, new competitive products (including new software and hardware
and enhancements to existing software and hardware) that keep pace with
technological developments and emerging industry standards. If we cannot
successfully identify, manage, develop, manufacture and market product
enhancements or new products, our business will be materially and adversely
affected.
13
Intense Competition
The storage system market is intensely competitive. We compete with traditional
suppliers of computer systems such as Hewlett-Packard, Sun Microsystems, IBM,
Compaq, and Dell, which market storage systems as well as other computer
products, and which recently have become more focused on marketing storage
systems. We also compete against independent storage system suppliers including,
but not limited to, EMC, including its Clariion division, MTI Technologies and
Dot Hill. Major competitors in our indirect customer business include Eurologic
Systems, Xyratec and JMR Electronics.
Many of these competitors are significantly larger than our company, and have
significantly greater financial, technical, marketing, purchasing and other
resources than we do, and as a result may be able to respond more aggressively
to new or emerging technologies and changes in customer requirements, or devote
greater resources to the development, promotion and sale of products than we
can, or to deliver competitive products at a lower end-user price.
Increased competition is likely to result in price reductions, reduced operating
margins and loss of market shares, any of which could have a material adverse
effect on our business, operating results or financial condition. In fact,
competitive pricing pressures have had, and may continue to have, an adverse
effect on our revenues and earnings.
If we are unable to develop and market products to compete with our competitors
products, our business will be materially adversely affected. In addition, if
major customers who are also competitors cease purchasing our products so that
they can concentrate on sales of their own products, our business could be
materially adversely affected.
Pending Litigation
In June and August 1996, our company and two of our then directors were served
with two separate complaints filed in the Supreme Court of the State of New
York, County of Nassau, in which the plaintiffs claim to have had contractual
and proprietary interests in the prospect of a transaction to purchase certain
net assets acquired by us. The plaintiffs seek compensatory damages, punitive
damages, and equitable relief for alleged interference with the plaintiffs'
alleged rights and for alleged breach of contract. Our counsel believes that we
have good defenses to both claims and that we will not incur any material
liability. We are not aware of any facts that would support any of the
plaintiffs' claims and, accordingly, we believe that the claims are without
merit.
Lack of Long Term Contracts
We generally do not enter into long-term purchase commitments with our customers
and customers generally have certain rights to extend or to delay the shipment
of their orders, as well as the right to return products and cancel orders under
some circumstances. The cancellation or rescheduling of orders placed by our
customers or the return of products shipped to them, could materially and
adversely affect our business.
14
Product Defects
Storage system products like those that we offer may contain undetected software
errors or failures when first introduced or as new versions are released. We
cannot be certain that, despite testing, errors will not be found in new
products after commencement of commercial shipments.
Our standard warranties provide that if a system does not function to published
specifications we will repair or replace the defective component without charge.
Significant warranty costs could have a material adverse effect on our business.
Availability of Competing Products
In the United States, we sell our products both through a direct sales force and
through indirect sale channels. Our OEMs, VARs and System Integrators may also
carry competing product lines, and could reduce or discontinue sales of our
products, which could have a material adverse effect on our operating results.
A Significant Percentage Of Our Expenses Are Fixed Which May Affect Our
Operating Results.
Our expense levels are based in part on our expectations as to future sales, and
a significant percentage of our expenses are fixed, which limits our ability to
reduce expenses quickly in response to any revenue shortfalls. As a result, if
revenues do not meet our revenue projections, operating results may be
disproportionately affected. We may experience revenue shortfalls for various
reasons, including:
o sudden shortages of raw materials or fabrication, test or assembly
capacity constraints that lead our suppliers to allocate available
supplies or capacity to other customers, which, in turn, may harm our
ability to meet our sales obligations; and
o the reduction, rescheduling or cancellation of customer orders.
In addition, we typically plan our production and inventory levels based on
internal forecasts of customer demand, which is highly unpredictable and can
fluctuate substantially. From time to time, in response to anticipated long lead
times to obtain inventory and materials from our outside suppliers, we may order
materials in advance of anticipated customer demand. This advance ordering may
result in excess inventory levels or unanticipated inventory write-downs if
expected orders fail to materialize.
Lengthy Sales Cycles
Customer orders can range in value from a few thousand dollars to over a million
dollars. The length of time between initial contact with a potential customer
and sale of a product, or "sales cycle", also can vary greatly and can be as
long as three to twenty-four months. This is particularly true for the sale and
installation of complex, turnkey solutions, which often are sold directly to end
users. Our revenues are likely to be affected by the timing of larger orders,
which makes it difficult for us to predict such revenues. Revenue for a quarter
could be reduced if large orders forecasted for a certain quarter are delayed or
are not realized. Factors that could delay or defer an order include:
o time needed for technical evaluations by customers;
o customer budget restrictions and changes to budgets during the course
of a sales cycle;
o customer internal review and testing procedures; and
o engineering work needed to integrate a storage solution with a
customer's system.
15
Potential Infringement of Intellectual Property Rights
We rely on a combination of trade secrets, copyrights, trademarks, patents,
domain names and employee and third-party nondisclosure agreements to protect
our intellectual property rights. The steps taken to protect our rights may not
be adequate to prevent misappropriation of our technology or to preclude
competitors from developing products with features similar to our products.
Furthermore, third parties may assert infringement claims against us or with
respect to our products for which we have indemnification obligations to certain
of our customers. Asserting our rights or defending against third-party claims
could involve substantial expense which could have a material adverse effect on
our operating results. In the event a third party were successful in a claim
that one of our products infringed the third party's proprietary rights, we may
have to pay substantial damages or royalties, remove that product from the
marketplace or expend substantial amounts in order to modify the product so that
it no longer infringes such proprietary rights, any of which could have a
material adverse effect on our operating results.
Loss of Key Suppliers
We rely on other companies to supply certain key components of our products. Our
products are typically designed to operate with unique components that are
available from a single source. For example, certain of our products are
dependent upon controllers designed by one of our suppliers. Although we can use
other suppliers, the delay in integrating these parts into our solutions will
increase product costs. Other components, while not dependent on one source,
may, from time to time, be in short supply or unavailable for a period of time
while alternative sources can be identified. Modification to the particular
products, requalification of the products with applicable regulatory agencies,
and additional testing to assure software and hardware is compatible can result
in lost or deferred revenue as well as higher product costs.
In addition, we resell subsystems, software and services from others. This
leaves us vulnerable to inadequate supply, uneven allocation in times of
shortage, delays in order fulfillment, and contract terminations.
Concentrated Customer Base
We operate predominantly in one business segment, information storage solutions,
including external RAID subsystems. In past years, a large percentage of our
revenues came from the sale of products to a small number of significant
clients. Sales to two customers, Silicon Graphics (SGI), an OEM, and Intel, a
direct sales customer, accounted for 15% and 11%, respectively, of our 1999
revenues.
During the second quarter of 1999, we entered into an OEM agreement to supply
high-performance RAID storage enclosures to SGI, a major server manufacturer.
The initial term of the arrangement was expected to be for three years. Between
May and October 1999, sales to SGI totaled approximately $6 million. In the
third quarter of 1999, SGI decided to phase out their Windows NT product to
which our storage systems were attached. As a direct result, actual shipments to
SGI after October 1999 were minimal.
An economic downturn in any industry or geographical area targeted by us, or the
loss of one or more customers, particularly a significant customer, could result
in a material decrease in revenues, thereby materially adversely affecting our
operating results.
16
Narrow Market
Substantially all of our revenues to date have been concentrated in the UNIX,
Windows NT and Windows 2K marketplace. A large portion of our revenues
associated with versions of UNIX are manufactured by Sun Microsystems (Sun). If
Sun were to change its policy of supporting open systems computing environments
and if our products were thereby rendered incompatible with Sun products, our
results of operations could be materially and adversely affected.
Volatile Stock Price
Our common stock has experienced in the past, and could experience in the
future, substantial price volatility as a result of a number of factors,
including:
o quarter to quarter variations in actual or anticipated financial
results;
o announcements by us, our competitors or our customers;
o government regulations; and
o developments in the computer storage and technology industry and the
economy in general.
In addition, the stock market has experienced extreme price and volume
fluctuations which have affected the market price of many technology companies
in particular and which have at times been unrelated to the operating
performance of the specific companies whose stock is traded. Broad market
fluctuations and general economic conditions may adversely affect the market
price of our common stock.
Insufficient Funding
We have expended and will continue to be required to expend substantial funds to
continue research and development, and for other aspects of our business.
Accordingly, we may need or elect to raise additional capital. Our capital
requirements will depend on many factors, including:
o the problems, delays, expenses and complications frequently
encountered by technology companies;
o the progress of our research, development and product testing
programs;
o the success of our sales and marketing programs;
o costs in filing, prosecuting, defending and enforcing intellectual
property rights;
o the extent and terms of any collaborative research, manufacturing,
marketing or other arrangements; and
o changes in economic, regulatory or competitive conditions or our
planned business.
Estimates about the adequacy of funding for our activities are based on certain
assumptions, including the assumption that research, development and testing
relating to our products under development can be conducted at projected costs
and within projected time frames and that such products can be successfully
marketed.
To satisfy our capital requirements, we may seek to raise funds in the public or
private capital markets. Our ability to raise additional funds in the public or
private markets will be adversely affected if the results of our ongoing or
future research and development programs are not favorable. We may seek
additional funding through corporate collaborations and other financing
vehicles. Such funding may not be available, or if available, it may not be
available on acceptable terms. If adequate funds are not available, we may be
required to curtail our operations significantly, or we may be required to
obtain funds through arrangements with future collaborative partners or others
that may require us to relinquish rights to some or all of our technologies or
products under development. If we are successful in obtaining additional
financing, the terms of the financing may have the effect of diluting or
adversely affecting the holdings or the rights of the holders of our common
stock.
17
Shares Eligible for Future Sale by Current Security Holders
If our current security holders sell substantial amounts of our common stock,
including shares issued upon the exercise of outstanding options and warrants or
the conversion of outstanding preferred stock, in the public market, the market
price of our common stock could fall. Restrictions under the securities laws and
certain lock-up agreements limit the number of shares of common stock available
for sale in the public market. Substantially all of the shares of the common
stock (35,478,489 shares as of March 30, 2001) are freely tradable without
restriction or further registration under the Securities Act, unless such shares
are held by our "affiliates" as that term is defined in Rule 144 under the
Securities Act. As of March 30, 2001, the number of shares held by affiliates
was 13,624,586. Common stock (including shares issuable on the exercise of
outstanding options and warrants or the conversion of outstanding preferred
stock) held by officers and directors are deemed restricted securities within
the meaning of Rule 144. Restricted securities may be sold in the public market
only if they have been registered under the Securities Act or if their sales
qualify under Rule 144 or another available exemption from the registration
requirements of the Securities Act.
Potential Dilution; Reduction of Stock Price
The shares issuable to Wishmasters pursuant to an equity line of credit will be
issued at a 7% discount to the average daily price of our common stock.
Accordingly, the shares of common stock then outstanding will be diluted.
Depending on the price per share of our common stock, we may need to register
additional shares for resale to access the full amount of financing available,
which could have a further dilutive effect on the value of our common stock.
If we sell shares of our common stock to Wishmasters pursuant to the equity line
of credit and then Wishmasters sells the common stock, our common stock price
may decrease due to the additional shares in the market. As the price of our
common stock decreases, and if we decide to draw down on the equity line of
credit, we will be required to issue more shares of our common stock for any
given dollar amount invested by Wishmasters, subject to a designated minimum put
price specified by us. This may encourage short sales, which could place further
downward pressure on the price of our common stock.
Our Auditor's Have Expressed Substantial Doubt as to Our Ability to
Continue as a "Going Concern"
The auditor's report for our consolidated financial statements for the year
ended December 31, 2000 states that because we are not in compliance with
certain financial covenants under our existing bank facility and given our
recurring operating losses and our continued experience of negative cash flows
from operations, there is substantial doubt about our ability to continue as a
going concern. A "going-concern" opinion indicates that the financial statements
have been prepared assuming we will continue as a going-concern and do not
include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification of
liabilities that may result from the outcome of this uncertainty.
18
Maintenance of American Stock Exchange (AMEX) Listing
If we fail to continue to satisfy the maintenance criteria for listing our
common stock on the AMEX, the AMEX may delist our common stock from trading.
There is no assurance that our common stock will continue to satisfy the
requirements for listing on the AMEX. Delisting of our commons stock may have an
adverse impact on the market price and liquidity of our common stock.
Item 2. Properties
Our principal executive, administrative, sales and manufacturing activities are
located in approximately 42,400 square feet of facilities in San Diego,
California. The present annual base rent for our San Diego facility is $331,000.
The space is occupied under a lease agreement with an entity owned by W. David
Sykes, a former officer of the Company. The lease expires in March 2003.
We lease approximately 18,000 square feet of office and warehouse space in Lake
Mary, Florida, under a lease agreement that expires in February 2002, at a base
rent of approximately $119,000.
We distribute products through a network of thirteen sales offices worldwide. We
believe our existing facilities are adequate to meet future needs. See Notes 12
and 13 of the Notes to Consolidated Financial Statements for information
regarding the Company's obligations under its facilities leases.
Item 3. Legal Proceedings
In June 1996, Jack Ehrenhuas, Mark Schindler, Eugene Stricker, Amnon Damty, Ehud
Mendelson and Susan Felton filed a Complaint in the Supreme Court of the State
of New York, County of Nassau, against us and Michael Wise, our then Chairman of
the Board and a current director. The plaintiffs claim to have contractual and
proprietary interests in the prospect of a transaction to purchase certain net
assets acquired by us and seek compensatory damages plus punitive damages.
In August 1996, The Nais Corporation, Mark Schindler, Eugene Stricker, Amnon
Damty, Ehud Mendelson and Susan Felton filed a Complaint in the same Court
making similar allegations against one of our subsidiaries, its then president,
R. Daniel Smith, and a company controlled by Mr. Smith. In this action, the
plaintiffs seek compensatory damages plus punitive damages for alleged breach of
contract.
Both cases are currently in discovery. Our counsel believes that we have good
defenses to both claims and that we will not incur any material liability. We
are unaware of any facts that would support any of the plaintiffs' claims and,
accordingly, we believe that the claims are without merit.
From time to time, we are subject to legal proceedings and other claims arising
in the ordinary course of business. In our opinion, we are not a party to any
litigation the outcome of which would have a material adverse effect on our
business or operations.
Item 4. Submission of Matters to a Vote of Security Holders
We did not submit any matters to the vote of our security holders during the
fourth quarter of fiscal 2000.
19
PART II
Item 5. Market for Our Common Equity and Related Stockholder Matters
Our common stock is traded on the American Stock Exchange (AMEX) under the
symbol NSO. The following table sets forth the high and low sales prices of our
common stock for each quarter during the years ended December 31, 2000 and 1999
as reported by AMEX. During that period, we did not pay any dividends on our
common stock and we do not expect to pay any dividends in the near future.
Market Price Range
--------------------
2000 High Low
---- -------- --------
First quarter $6.875 $2.375
Second quarter 5.250 2.500
Third quarter 3.438 1.750
Fourth quarter 2.688 0.813
1999
----
First quarter $3.938 $2.000
Second quarter 3.500 2.000
Third quarter 3.000 1.938
Fourth quarter 4.500 1.563
As of March 30, 2001, we had 35,478,489 shares of common stock
outstanding and approximately 1,760 holders of record of such stock.
Recent Sales of Unregistered Securities and Use of Proceeds
In December 2000, we issued 142,858 shares of our common stock in full
satisfaction of a $250,000 note payable.
In December 2000, we issued 2,000 shares of our Series G Preferred Stock to Mr.
Levy in satisfaction of $2 million of borrowings.
All of the foregoing issuances were exempt from registration under Section 4(2)
of the Act.
Item 6. Selected Financial Data
(dollars in thousands, except per share data)
The following table summarizes certain selected consolidated financial data for
the years ended December 31, 2000, 1999, 1998, and 1997, for the two month
transition period ended December 31, 1996, and for the year ended October 31,
1996. In November 1996, we changed our fiscal year from October 31 to December
31, effective with the calendar year beginning January 1, 1997.
20
Certain amounts for years prior to fiscal 2000 have been reclassified to conform
to the 2000 presentation. These reclassifications had no impact on operating
results previously reported. The selected financial data has been derived from
our audited consolidated financial statements and is qualified by reference to,
and should be read in conjunction with, the Consolidated Financial Statements
and Notes thereto and "Management's Discussion and Analysis of Financial
Condition and Results of Operations", included elsewhere in this report:
Two Months
Year Ended December 31, Ended Year Ended
----------------------------------------------------- December 31, October 31,
2000 1999(3) 1998 1997 1996 1996(6)
-------- -------- -------- -------- ------------ ----------
Sales $40,197 $41,089 $18,026 $26,244 $4,739 $5,619
Gross profit 9,872 9,763 2,768 4,783 1,348 2,072
(Loss) income from operations (26,291)(1) (16,501)(4) (9,491) (7,521) (105) 115
Net (loss) income (21,921)(2) (18,704)(5) (10,407) (7,886) (43) 12,798
Net (loss) income available
to common stock (22,606) (19,938) (11,888) (7,886) (43) 12,798
Basic and diluted net (loss)
income per common share (.69) (.89) (.63) (.42) (.00) .73
Average number of common
shares outstanding 32,789,832 22,505,084 18,888,911 18,670,477 18,670,477 17,606,477
At end of period:
Total assets 15,722 34,041 14,128 16,762 20,067 15,677
Long-term debt 7,258 6,329 7,043 1,504 516 510
Shareholders' (deficit) equity (7,526) 6,273 3,150 5,037 12,817 12,390
(1) Includes charge of $12 million for impairment of unamortized goodwill
related to an acquisition completed in 1999 and $1.4 million for a write-down of
obsolete inventory.
(2) Includes gain of $5.6 million on the sale of assets of Borg Adaptive
Technologies, Inc., a wholly-owned subsidiary.
(3) Includes results of operations of Andataco beginning June 1999, as a result
of the acquisition of Andataco, which was accounted for using the purchase
method of accounting.
(4) Includes charge of $6.4 million related to impairment of unamortized
goodwill attributable to an acquisition completed in 1996, a write-down of
obsolete inventory and employment termination costs.
(5) Includes extraordinary loss of $.5 million ($.02 per basic and diluted
share).
(6) Prior to June 1996, our only assets consisted of securities received in 1992
in exchange for substantially all of our operating assets. During that period,
our only activities consisted of monitoring those securities and evaluating
potential business opportunities. The 1996 net income principally consists of a
$12 million gain from the sale of those securities and also includes an
extraordinary gain of $.6 million ($.03 per basic and diluted share).
21
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward Looking Statements
With the exception of the discussion regarding historical information,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and other discussions elsewhere in this Form 10-K contain forward
looking statements. Such statements are based on current expectations subject to
uncertainties and other factors which may involve known and unknown risks that
could cause actual results of operations to differ materially from those
projected or implied. Further, certain forward-looking statements are based upon
assumptions about future events which may not prove to be accurate.
Risks and uncertainties inherent in forward looking statements include, but are
not limited to, our future cash flows and ability to obtain sufficient
financing, timing and volume of sales orders, level of gross margins and
operating expenses, lack of market acceptance or demand for our new product
lines, price competition, conditions in the technology industry and the economy
in general, as well as legal proceedings. The economic risk associated with
materials cost fluctuations and inventory obsolescence is significant to our
company. The ability to manage our inventories through procurement and
utilization of component materials could have a significant impact on future
results of operations or financial condition. Historical results are not
necessarily indicative of the operating results for any future period.
Subsequent written and oral forward looking statements attributable to us or
persons acting on our behalf are expressly qualified in their entirety by
cautionary statements in this Form 10-K and in other reports we filed with the
Securities and Exchange Commission. The following discussion should be read in
conjunction with the Consolidated Financial Statements and the Notes thereto
included elsewhere in this filing.
Overview
We are a manufacturer and supplier of highly integrated, enterprise-class
storage solutions for computing operations that include Windows NT and Windows
2K, UNIX and Linux platforms. Designed for storage-intensive environments such
as the Internet or other mission-critical applications, our products include
Fibre Channel storage enclosures, in addition to a complete set of SCSI, tape
and storage management solutions.
Our activities in the information storage industry have evolved through several
acquisitions, the first of which occurred in June 1996 when we acquired certain
assets associated with the storage business in Lake Mary, Florida from Seagate
Peripherals, Inc. In December 1996, we acquired substantially all the net assets
of Parity Systems, Inc. In June and July 1999, we acquired approximately 76% of
the outstanding common stock of Andataco, Inc., located in San Diego,
California, and in November 1999, we acquired the remaining 24% of Andataco. In
early 2000, we completed the transfer of our Lake Mary manufacturing operations
to our San Diego facility and moved our corporate headquarters to San Diego. As
a result of the 1999 acquisition of Andataco, we believe that period to period
comparisons may not be meaningful because Andataco's operating results were not
included in our consolidated financial statements until June 1999.
In January 2000, we acquired substantially all the assets of OneofUs Company
Limited, a Taiwan-based, privately held designer of high performance Fibre
Channel RAID controllers and storage solutions for open systems and the SAN
Market. In addition, in January 2000, we sold substantially all of the assets of
a wholly-owned subsidiary (Borg Adaptive Technologies, Inc.) which we had
acquired in April 1998, including certain patented technology referred to as
Adaptive RAID, to a subsidiary of QLogic Corporation for $7.5 million.
Beginning January 2000 with the placement of Larry Hemmerich as our President
and Chief Executive Officer, we have recruited substantially all of our
executive management team within the past year.
22
With respect to our consolidated financial statements for the year ended
December 31, 2000, we have received a "going-concern" opinion from our auditors.
As more fully described in the notes to the consolidated financial statements,
our recurring operating losses, our continued experience of negative cash flows
from operations and the fact that we are not in compliance with certain
financial covenants under our existing bank facility raise substantial doubt
about our ability to continue as a going concern. A "going-concern" opinion
indicates that the financial statements have been prepared assuming we will
continue as a going-concern and do not include any adjustments to reflect the
possible future effects on the ___ recoverability ___ and classification of
assets or the amounts and classification of liabilities that may result from the
outcome of this uncertainty.
Results of Operations
The following table sets forth certain operating data as a percentage of sales.
Year Ended December 31,
------------------------------------
2000 1999 1998
--------- --------- ---------
Sales 100% 100% 100%
Cost of sales 75 76 85
---- ---- ----
Gross profit 25 24 15
Selling, general and administrative 40 37 46
Research and development 9 7 14
Depreciation and amortization 11 8 8
Write-down of goodwill 30 11 -
---- ---- ----
Loss from operations (65) (39) (53)
Gain on sale of Borg assets 14 - -
Interest expense and other, net (3) (4) (5)
---- ---- ----
Loss before extraordinary item (54) (43) (58)
Extraordinary loss from debt
extinguishment - (1) -
----- ----- -----
Net loss (54)% (44)% (58)%
===== ===== =====
Comparison of Fiscal Years Ended December 31, 2000 and December 31, 1999
For the year ended December 31, 2000, we reported a net loss of $21.9 million as
compared to a net loss of $18.7 million for the year ended December 31, 1999.
Results of operations for 2000 include a net gain of $5.6 million from the sale
of Borg (see Note 3 to Consolidated Financial Statements) and the impairment of
unamortized goodwill in the amount of $12 million (see Note 1 to Consolidated
Financial Statements). Results of operations for 1999 include an extraordinary
loss of $.5 million on extinguishment of debt (see Note 6 to Consolidated
Financial Statements) and the impairment of unamortized goodwill of $4.6 million
(see Note 1 to Consolidated Financial Statements).
Sales
Sales for the year ended December 31, 2000 were $40.2 million as compared to
$41.1 million in 1999, a decrease of $.9 million or 2%. Although 2000 included a
full year of sales resulting from the Andataco acquisition as compared to seven
months during 1999, our overall sales have decreased primarily as a result of
the transition from our older technology legacy products to newer technology
solutions. Our current line of products is centered around our new NexStor 2U
(3.5" high) storage enclosures and RAID systems. We began shipping these new
generation products in the third quarter of 2000; however, during the second
half of the year, the decline in revenues of our older products exceeded the
increase in sales of our newer technology products. Delays in shipments of both
product lines, resulting from unexpected supplier issues which have since been
resolved, also contributed to the revenue decline.
23
During 2000, our revenues consisted of $30.2 million in direct sales to end
users, $5.6 million in indirect sales to OEMs, value-added resellers (VARs) and
other channel business and $4.4 million in service revenues. We have recently
experienced significant growth in our indirect customer base and since October
2000, have entered into various agreements with domestic and international OEM's
and resellers. We expect further expansion of our indirect business, which we
anticipate will provide a significant new source of revenues. In order to take
advantage of the opportunities available in the indirect business channels, we
have recently shifted our sales and marketing strategy to provide greater
technical, marketing and sales support to our indirect sales function. As part
of this strategy, since January 2001 we have reduced our direct sales personnel
and related costs, and have begun to refocus our direct sales team to designated
markets such as the Federal Government and companies in the oil and gas
industries as well as existing large customers. During the first quarter of
2001, the Company's total sales were approximately $6.2 million.
Cost of Sales/Gross Margin
Gross margins increased from 24% in 1999 to 25% in 2000. Gross margins in both
periods were adversely affected by less than full utilization of production
capacity due to lower than expected sales levels as well as increases in
inventory reserves due to obsolete inventory of $1.6 million and $1.5 million in
2000 and 1999, respectively. Our gross margins are dependent, in part, on
product mix which fluctuates from time to time.
Selling, General and Administrative Expenses
For the year ended December 31, 2000, selling, general and administrative
expenses increased to $16.2 million (40% of sales) from $15.3 million (37% of
sales) in 1999. The $.9 million increase is primarily the result of the
inclusion in 2000 of a full twelve months of expenses related to the Andataco
acquisition, as compared to seven months included in 1999 operations, partially
offset by an approximate $1 million provision for uncollectable receivables in
1999. We expect these costs to decrease during fiscal 2001 as a direct result of
the reduction in our overall workforce in January 2001 as part of the
restructuring of our sales and marketing efforts discussed under "Sales".
Research and Development
Research and development expenses for the year ended December 31, 2000 amounted
to $3.5 million, representing 9% of sales, as compared to $3 million, or 7% of
sales, in 1999. During January 2000, we sold substantially all of the assets of
our Borg subsidiary, which had contributed $.8 million to our research and
development expenses during 1999. The decline in costs resulting from this sale
was more than offset by additional costs incurred in 2000 in connection with the
development of our new product line as well as the inclusion of a full year of
expenses related to the Andataco acquisition. We believe that considerable
future investments in research and development will be required to remain
competitive and we expect these expenses will continue to increase in future
periods.
24
Research and development costs are expensed as incurred and may fluctuate
considerably from time to time depending on a variety of factors. These costs
are substantially incurred in advance of related revenues, or in certain
situations, may not result in generating revenues.
Depreciation and Amortization / Impairment of Goodwill
Depreciation and amortization increased to $4.5 million for the year ended
December 31, 2000 from $3.4 million in 1999. These increases were primarily due
to a full year of amortization (over seven years) of $14.7 million of goodwill
associated with the Andataco acquisition, effective in June and November 1999,
and $2.8 million of goodwill (over seven years) associated with the January 2000
acquisition of the assets of OneofUs, partially offset by reduced amortization
resulting from the fourth quarter 1999 write-down of $4.6 million of goodwill
related to our 1996 Parity acquisition. The Parity goodwill was determined to
have been impaired because of our inability to generate future operating income
from the assets acquired in the Parity acquisition.
During the fourth quarter of 2000 (see Note 16 to Consolidated Financial
Statements), we recorded a goodwill write-down of approximately $12 million.
This write-down eliminated all unamortized goodwill related to the 1999
acquisition of Andataco. The Andataco goodwill was determined to have been
impaired because of our inability to generate sufficient future operating income
from the assets acquired in the Andataco acquisition.
Interest Expense
Interest expense decreased $.8 million to $1.3 million in 2000, primarily as a
result of the satisfaction of borrowings of $6.5 million by the issuance of
common stock ($5.5 million in December 1999 and $1 million in April 2000). This
reduction was partially offset by a full twelve months of interest on the $5.1
million note issued in connection with the Andataco acquisition as compared to
seven months of interest in 1999.
Income Taxes
We have recorded a 100% valuation-allowance for deferred income tax assets
which, more likely than not, will not be realized based on recent operating
results.
Preferred Stock Dividends
During 2000 and 1999, all classes of our convertible preferred stock required
dividends at 8%-9% per annum. Preferred stock dividends decreased by $.2 million
to $.7 million during 2000 principally due to the conversion of $8 million of
preferred stock to common stock in 2000, partially offset by the issuance of
$8.2 million of preferred stock in June 1999.
During 1999, we recorded $.3 million as an additional embedded dividend
attributable to: (1) the fair value at the date of grant of warrants issued in
connection with the sale of Series E Convertible Preferred Stock (based on the
Black-Scholes option-pricing model) and (2) the beneficial conversion privilege
on Series A Convertible Preferred Stock representing the difference between the
conversion price and the quoted market price of common stock at the date of
issuance.
Comparison of Fiscal Years Ended December 31, 1999 and December 31, 1998
We reported a net loss of $18.7 million for the year ended December 31, 1999 as
compared to a net loss of $10.4 million for the year ended December 31, 1998.
25
Results of operations for fiscal 1999 included an extraordinary loss of $.5
million on extinguishment of debt (see Note 6 to Consolidated Financial
Statements) and a write-down of unamortized goodwill for approximately $4.6
million (see Note 1 to Consolidated Financial Statements).
Sales
Sales for the year ended December 31, 1999 were $41.1 million as compared to $18
million during the preceding year, an increase of $23.1 million or 128%
primarily resulting from the acquisition of Andataco in June 1999. This increase
was partially offset by delays in the market introduction of certain new
generation products and our elimination of non-storage related businesses,
including memory and integrated systems divisions (approximately $2.1 million in
1998).
During the second quarter of 1999, we entered into an OEM agreement to supply
high-performance RAID storage enclosures to SGI, a major server manufacturer.
The initial term of the arrangement was expected to be for three years. Between
May and October 1999, sales to SGI totaled approximately $6 million. In the
third quarter of 1999, SGI made the decision to phase out their Windows NT
product to which our storage systems were attached. As a direct result, actual
shipments to SGI subsequent to October 1999 were minimal. SGI accounted for 15%
of our net sales for 1999. Two OEM customers, Discrete Logic and Intergraph
Corp., accounted for 27% and 13%, respectively, of 1998 net sales.
Cost of Sales/Gross Margin
Gross margin for 1999 increased to 24% from 15% for 1998. Contributing to the
improved gross margins were the Andataco product sales and the utilization of
Andataco's sales channels to market our products. During 1999 and 1998, gross
margins reflect write-downs due to obsolete inventory amounting to $1.5 million
and $1.4 million, respectively. Our gross margins are dependent, in part, on
product mix which fluctuates from time to time.
Selling, General and Administrative Expenses
Selling, general and administrative costs for 1999 increased to $15.3 million
(37% of sales) from $8.3 million (46% of sales) for 1998. This increase was
primarily the result of the acquisition of Andataco, which was partially offset
by a reduction in operating expenses at our Lake Mary location. The reduction in
expenses at that location was primarily attributable to the elimination of
expenses associated with the integrated system division that was sold in October
1998. The most significant increase in 1999 expenses resulted from compensation
and related benefits of additional employees brought about by the Andataco
acquisition.
Research and Development
Research and development expenses for 1999 amounted to $3 million, representing
7% of sales as compared to 1998 when expenses were $2.6 million or 14% of sales.
Research and development costs are expensed as incurred and may fluctuate
considerably from time to time depending on a variety of factors. These costs
are substantially incurred in advance of related revenues, or in certain
situations, may not result in generating revenues.
Depreciation and Amortization / Impairment of Goodwill
Depreciation and amortization increased to $3.4 million for 1999 from $1.4
million for 1998, principally due to the acquisition of Andataco, which added
$1.1 million of amortization of goodwill and $.8 million of depreciation in
1999.
26
During the fourth quarter of 1999 we recorded a goodwill write-down of
approximately $4.6 million. This write-down eliminated all remaining unamortized
goodwill related to the 1996 acquisition of Parity. The Parity goodwill was
determined to have been impaired because of our inability to generate future
operating income from the assets acquired in the Parity acquisition.
Interest Expense
Interest expense in 1999 increased $1.1 million over 1998 as a result of the
acquisition of Andataco which significantly increased our net average
borrowings.
Income Taxes
We have recorded a 100% valuation allowance for deferred tax assets which, more
likely than not, will not be realized based on recent operating results.
Preferred Stock Dividends
EITF 98-5 addresses accounting for preferred stock which is convertible into
common stock at a discount from the market rate at the date of issuance. In
accordance with this EITF, a preferred stock dividend attributable to such a
beneficial conversion privilege should be recorded for the difference between
the conversion price and the quoted market price of common stock at the date of
issuance. Accordingly, during 1999 we recorded $.3 million as an embedded
dividend attributable to the beneficial conversion privilege of certain classes
of our convertible preferred stock as compared to $1.2 million in 1998.
In addition, for the year ended December 31, 1999, all classes of our
convertible preferred stock required cumulative dividends at 8% and aggregated
$.9 million as compared to $.3 million in 1998. The increase was principally due
to additional issuances of preferred stock in 1999.
Liquidity and Capital Resources
The accompanying consolidated financial statements have been prepared assuming
that we will continue as a going concern. This contemplates the realization of
assets and the satisfaction of liabilities in the normal course of business. As
shown in the consolidated financial statements, we have suffered substantial
recurring net losses of $21.9 million, $18.7 million and $10.4 million for the
years ended December 31, 2000, 1999 and 1998, respectively, have negative
working capital and a shareholders' deficit at December 31, 2000, and are in
default under our existing bank credit facility. These matters, among others,
raise substantial doubt about our ability to continue as a going concern.
In early 2000, in an effort to bring us to profitability, we successfully
recruited a new executive management team. During most of 2000, our management
team formulated and implemented our current product strategy centered around our
NexStor 2U line of Storage Area Network (SAN-ready) storage solutions. This
strategy included the transition from our older technology legacy products to
the newer technology solutions, which we began shipping in the third quarter of
2000. During the second half of the year, the decline in revenues of our older
products exceeded the increase in sales of our newer technology solutions, which
contributed to our operating loss.
However, we have recently experienced growth in our indirect customer channel
base (original equipment manufacturers (OEMs), value added resellers (VARs) and
system integrators). Since October 2000, we have entered into various agreements
with domestic and international OEMs, VARs and system integrators. In addition,
we have received indications of approval from a number of other indirect
customers. In 2000, indirect sales represented a small percentage of our total
sales revenues. In an effort to capitalize on this growth trend and
simultaneously reduce operating costs, we recently shifted our sales and
marketing strategy to provide an emphasis on our indirect sales function. As
part of this strategy, since January 2001, we have reduced our direct sales
personnel and related costs, and have begun to focus our direct sales team to
certain designated markets. Our operating results are expected to be positively
affected by an increase in indirect sales; however, there is no assurance that
an increase will occur.
27
Historically, we have been successful in securing significant amounts of equity
and debt financing to support our operating deficits. Since late 1997 and
through April 16, 2001, we obtained net cash proceeds of $36.1 million from
private investors, including $4.4 million since December 31, 2000. Of these
amounts, $12.4 million was received from H. Irwin Levy, our Chairman of the
Board and a principal shareholder, or companies controlled by Mr. Levy
(collectively, Mr. Levy). Additional cash of approximately $7 million was
obtained during January 2000 when we sold substantially all the assets of our
wholly-owned subsidiary, Borg Adaptive Technologies, Inc. (see Note 3 to
Consolidated Financial Statements).
Effective April 12, 2001, holders of all of our notes payable totaling $11.9
million (including $110,000 in accrued interest) on that date, verbally agreed
to exchange their notes for Series H and Series I Convertible Preferred Stock
(the "Exchange") with a stated value of $11.9 million (including $3.6 million
held by Mr. Levy). If the Exchange is completed, as of April 12, 2001, our only
outstanding debt, other than our trade payables and other operating liabilities,
will consist of our Bank Line of Credit, and our shareholder's equity will
increase by $11.9 million. On April 12, 2001, our Series G Preferred Stock (held
by Mr. Levy) with a stated value of $2 million was converted into Series I
Convertible Preferred Stock with a stated value of $2 million.
The Series H and I Convertible Preferred Stock accrues dividends at 10% per
annum, payable quarterly, and is convertible into shares of our common stock
based on a fixed conversion price of $.72 per share, the closing market price on
the date prior to the Exchange.
We are currently exploring various alternatives for raising additional debt or
equity capital to finance our short-term and long-term plans as well as
operating deficits expected to be incurred until we begin to generate positive
operating cash flows. We expect to be able to obtain sufficient funds to satisfy
our working capital needs during the next twelve months, as presently
contemplated. However, due to conditions in the technology-related financial
markets and other uncertainties, many of which are outside our control, there
can be no assurance that such required additional funds will be available on
terms acceptable to management, if at all, or that we will be able to generate
positive cash flows from operations in the future.
Our revolving credit facility (Bank Line of Credit) provides for borrowings
based on the lesser of $10 million or: (i) 85% of eligible accounts receivable,
as defined, plus (ii) the lesser of $1.75 million or 23% of eligible inventory,
as defined. Effective April 14, 2000, interest under the Bank Line of Credit was
increased from prime plus .5% to prime (9.5% at December 31, 2000) plus 1.5%.
The Bank Line of Credit matures in April 2002, requires a facility fee of .25%
based on the average unused portion of the maximum borrowings, contains a
default interest rate provision of an additional 2%, is collateralized by
substantially all of our assets, and provides for certain financial covenants,
including minimum net worth and net income requirements. As of December 31,
2000, the outstanding balance of the Bank Line of Credit was $4.1 million and an
additional approximately $.5 million was available based on eligible collateral.
28
At December 31, 2000, we were not in compliance with our minimum net worth and
net income covenants under our Bank Line Of Credit and are in technical default
under the compliance provisions. We are currently in discussions with the lender
to amend those covenants. Although management believes we will be successful in
these discussions, there can be no assurance of this success nor that management
will be successful in obtaining a replacement lender with acceptable terms if we
are not successful.
On May 4, 2000, we entered into an agreement with a private investment group
granting us a one-year $15 million equity line or equity draw down facility. The
agreement does not obligate us to draw any of the funds. Once per draw down
period, we may request a draw of up to $5 million, subject to a formula based on
average stock price and average trading volume, setting the maximum amount of
any request for any given draw. The amount of money that the investment group
will provide to us and the number of shares that we will issue to the investment
group in return for that money is settled on a weekly basis during a 22 day
trading period following the draw request based on a formula as defined in the
stock purchase agreement. The investment group receives a 7% discount to the
market price for the 22-day period and we receive the settled amount of the draw
down less a 4% fee payable to the placement agent. As of December 31, 2000, we
have issued 508,857 shares of common stock and received $1 million in net
proceeds pursuant to this agreement.
The consolidated financial statements do not include any adjustments to reflect
the possible future effects on the recoverability and classification of assets
or the amounts and classification of liabilities that may result from our
inability to continue as a going concern.
Cash Flow Results
Operating Activities
Net cash used by operating activities amounted to $9.4 million and $5.3 million
for the years ended December 31, 2000 and 1999, respectively. The most
significant use of cash for both fiscal years was our loss from operations
(before depreciation, amortization and other non-cash items) of $6.1 million in
2000 and $8.1 million in 1999. The most significant source of cash for 2000 was
the reduction of accounts receivable of $2.1 million, which was more than offset
by a $2.9 million increase in inventories and a $2.8 million decrease in
accounts payable and other liabilities. The 1999 loss from operations was
partially offset by a $1.5 million decrease in inventories, and a $.6 million
decrease in accounts receivables.
Investing Activities
Net cash provided by investing activities for the year ended December 31, 2000
amounted to $5.9 million principally due to $7 million in net cash proceeds from
the Borg sale. Cash used for acquisitions totaled $.3 million and $1.4 million
during 2000 and 1999, respectively. Cash used for purchases of property and
equipment was $.9 million and $.8 million during 2000 and 1999, respectively.
Financing Activities
Net cash provided by financing activities for 2000 amounted to $2.9 million,
principally consisting of $1.5 million in net borrowings, $1.2 million from the
exercise of stock options and warrants, and $1 million from our equity draw down
facility. Net cash provided by financing activities for 1999 amounted to $7.9
million, and primarily consisted of net borrowings of $3.3 million, $2.0 million
from the issuance of convertible preferred stock and $3.5 million from the
issuance of common stock (including $2.5 million from the exercise of stock
options and warrants). During both years, we paid $.8 million in preferred stock
dividends.
29
Effect of Inflation
During recent years, inflation has not had an impact on our operations and we do
not expect that it will have a material impact in 2001.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
Our exposure to market risk for changes in interest rates relates primarily to
our variable rate Bank Line of Credit.
30
Item 8. Financial Statements and Supplementary Data
Table of Contents to Consolidated Financial Statements
Page
Report of Independent Certified Public Accountants 31
Consolidated Financial Statements:
Balance sheets - December 31, 2000 and 1999 32
Statements of Operations - Year Ended
December 31, 2000, 1999 and 1998 33
Statements of Shareholders' (Deficit) Equity -
Year Ended December 31, 2000, 1999 and 1998 34-36
Statements of Cash Flows - Year Ended
December 31, 2000, 1999 and 1998 37-38
Notes to Consolidated Financial Statements 39-59
Report of Independent Certified Public Accountants 60
FINANCIAL STATEMENT SCHEDULES. The following financial statement schedules of
nStor Technologies, Inc. for the years ended December 31, 2000, 1999 and 1998
are filed as part of this Report on the page number so indicated and should be
read in conjunction with the Consolidated Financial Statements of nStor
Technologies, Inc.:
Schedule I - Condensed Financial Information of Registrant 61-63
Schedule II - Valuation and Qualifying Accounts 64
Schedules not listed above are omitted because they are not applicable or are
not required or the information required to be set forth therein is included in
the Consolidated Financial Statements or Notes thereto.
31
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors of
nStor Technologies, Inc.
We have audited the accompanying consolidated balance sheets of nStor
Technologies, Inc. and subsidiaries (the "Company") as of December 31, 2000 and
1999, and the related consolidated statements of operations, shareholders'
(deficit) equity and cash flows for each of the three years in the period ended
December 31, 2000. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of nStor Technologies,
Inc. and subsidiaries as of December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000 in conformity with accounting principles generally accepted in
the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has suffered substantial
recurring loses from operations, has a working capital deficiency, a
shareholders' deficit and is in default under its existing credit facility.
These matters, among others, raise substantial doubt about the Company's ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note 1. The accompanying consolidated financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
/S/ BDO SEIDMAN, LLP
BDO SEIDMAN, LLP
Costa Mesa, California
February 9, 2001, except as to
Paragraph four of Note 6 and
Note 15, which are as of March 27, 2001
32
nSTOR TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
=========================================
(dollars in thousands)
December 31,
-----------------
ASSETS 2000 1999
------ ------- -------
Current assets:
Cash and cash equivalents $ 37 $ 673
Accounts receivable 4,395 7,326
Inventories 5,174 6,288
Prepaid expenses and other 1,278 1,614
------- -------
Total current assets 10,884 15,901
Property and equipment, net of $4,583 and
$2,932 in accumulated depreciation 2,384 3,476
Goodwill and other intangible assets, net of
$400 and $1,311 in accumulated amortization 2,397 14,533
Other non current assets 57 131
------- -------
$15,722 $34,041
LIABILITIES ======= =======
-----------
Current liabilities:
Bank line of credit $ 4,086 $ 5,111
Director loans - 1,585
Convertible notes - 629
Deferred revenue 2,400 2,426
Accounts payable and other 9,504 11,688
------- -------
Total current liabilities 15,990 21,439
Long-term debt:
Notes payable 5,600 6,329
Director loans 1,658 -
------- -------
Total liabilities 23,248 27,768
------- -------
Commitments, contingencies and subsequent events
SHAREHOLDERS' (DEFICIT) EQUITY
------------------------------
Preferred stock, $.01 par; 1,000,000 shares authorized,
in order of preference:
Convertible (except for Series G) preferred stock
issued and outstanding as of December 31, 2000
and 1999, respectively: Series F, 722 and 4,054,
aggregate liquidation value $722 and $4,054;
Series A, 0 and 1,667, aggregate liquidation
value $0 and $1,000; Series C, 0 and 3,000,
aggregate liquidation value $0 and $3,000;
Series D, 2,000 and 2,700, aggregate liquidation
value $2,000 and $2,700; Series E, 3,500 in 2000
and 1999, aggregate liquidation value $3,500;
Series G, 2,000 and 0, aggregate liquidation value
$2,000 and $0 - -
Common stock, $.05 par; 75,000,000 shares authorized;
35,478,489 and 26,517,824 shares issued and outstanding
at December 31, 2000 and December 31, 1999, respectively 1,773 1,331
Additional paid-in capital 71,529 63,164
Deficit (80,828) (58,222)
-------- --------
Total shareholders' (deficit) equity (7,526) 6,273
-------- --------
$15,722 $34,041
======== ========
See Report of Certified Public Accountants and accompanying notes to
consolidated financial statements.
33
nSTOR TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
=========================================
(dollars in thousands, except per share data)
Years Ended December 31,
------------------------------
2000 1999 1998
--------- --------- --------
Sales $40,197 $41,089 $18,026
Cost of sales 30,325 31,326 15,258
-------- -------- --------
Gross profit 9,872 9,763 2,768
-------- -------- --------
Operating expenses:
Selling, general and administrative 16,232 15,340 8,335
Research and development 3,504 2,981 2,572
Depreciation and amortization 4,468 3,355 1,352
Impairment of goodwill 11,959 4,588 -
-------- -------- --------
Total operating expenses 36,163 26,264 12,259
-------- -------- --------
Loss from operations (26,291) (16,501) (9,491)
Gain on sale of assets of Borg Adaptive
Technologies 5,575 - -
Other income 84 313 71
Interest expense (1,289) (2,051) (987)
-------- -------- --------
Loss before preferred dividends
and extraordinary loss (21,921) (18,239) (10,407)
Extraordinary loss from debt
extinguishment (net of tax of $0) - (465) -
-------- -------- --------
Net loss (21,921) (18,704) (10,407)
Preferred stock dividends (685) (902) (263)
Embedded dividend attributable to
beneficial conversion privilege
of Convertible Preferred Stock - (332) (1,218)
-------- --------- --------
Loss available to common stock ($22,606) ($19,938) ($11,888)
======== ========= ========
Basic and diluted net loss per common share:
Loss before extraordinary loss ($ .69) ($ .87) ($ .63)
Extraordinary loss - (.02) -
-------- --------- --------
Net loss per common share ($ .69) ($ .89) ($ .63)
======== ========= ========
Average number of common shares
outstanding, basic and diluted 32,789,832 22,505,084 18,888,911
========== ========== ==========
See Report of Certified Public Accountants and accompanying notes to
consolidated financial statements.
33
nSTOR TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' (DEFICIT) EQUITY
=========================================================
(dollars in thousands)
Preferred Addi-
Common Stock Stock tional
--------------------- ----------------- Paid-in
Shares Amount Shares Amount Capital Deficit Total
---------- ------ ------ -------- -------- --------- -------
Balances, January 1, 1998 18,670,477 $ 934 - $ - $ 30,499 $(26,396) $ 5,037
Issuance of convertible
preferred stock in connection
with:
Private placements, less
$272 of issuance costs 6,200 - 5,928 5,928
Satisfaction of borrowings,
less $9 of issuance costs 3,667 - 2,991 2,991
Redemption of convertible
preferred stock, including
$120 of redemption cost (a) (2,300) - (2,420) (2,420)
Issuance of common stock in
connection with:
Conversion of convertible
preferred stock 394,949 18 (200) - (18) -
Exercise of warrants 1,449,999 73 1,602 1,675
Preferred stock dividends (263) (263)
Embedded dividend attributable
to beneficial conversion
privilege of convertible
preferred stock 1,218 (1,218)
Common stock option and warrants
issued in connection with:
Long-term debt 427 427
Acquisition 148 148
Director compensation 34 34
Net loss for the year
ended December 31, 1998 (10,407) (10,407)
---------- ----- ----- ----- ------- -------- --------
Balances, December 31, 1998 20,515,425 1,025 7,367 - 40,409 (38,284) 3,150
34
nSTOR TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' (DEFICIT) EQUITY
=========================================================
(dollars in thousands)
Preferred Addi-
Common Stock Stock tional
--------------------- ----------------- Paid-in
Shares Amount Shares Amount Capital Deficit Total
---------- ------ ------ -------- -------- --------- -------
Issuance of convertible preferred
stock in connection with:
Private placement, less
$16 of issuance costs 3,500 - 3,484 3,484
Acquisition of Andataco,
less $21 of issuance costs 4,654 - 4,633 4,633
Issuance of common stock in
connection with:
Satisfaction of borrowings 2,523,462 126 6,714 6,840
Exercise of options and
warrants 1,686,241 85 2,760 2,845
Conversion of convertible
preferred stock 200,000 10 (600) - (10) -
Acquisition of Andataco 924,118 46 1,802 1,848
Private placement 500,000 25 975 1,000
Other 168,578 8 338 346
Committed common stock
related to executive
termination, 123,479 shares 6 584 590
Common stock options and
warrants issued in
connection with:
Long-term debt 791 791
Acquisition of Andataco 200 200
Non-employee compensation 152 152
Preferred stock dividends (902) (902)
Embedded dividend attributable to
beneficial conversion privilege
of convertible preferred stock 332 (332) -
Net loss for the year
ended December 31, 1999 (18,704) (18,704)
---------- ------ ------ ------ ------- -------- --------
Balances, December 31, 1999 26,517,824 1,331 14,921 - 63,164 (58,222) 6,273
Issuance of common stock
in connection with:
Conversion of convertible
preferred stock 6,477,467 324 (8,699) - (324) -
Acquisition of assets of
OneofUs 776,119 39 2,561 2,600
Exercise of options and
warrants 635,589 32 1,146 1,178
Equity line of credit,
less $87 of issuance
cost 508,857 25 936 961
Satisfaction of borrowings 439,154 22 1,228 1,250
Commitment related to
executive termination 123,479 - - -
36
nSTOR TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' (DEFICIT) EQUITY
===============================================
(dollars in thousands) (concluded)
Preferred Addi-
Common Stock Stock tional
--------------------- ----------------- Paid-in
Shares Amount Shares Amount Capital Deficit Total
---------- ------ ------ -------- -------- --------- -------
Issuance of preferred stock
in satisfaction of borrowings
from director 2,000 - 2,000 2,000
Compensation expense resulting
from modifications to stock
options and warrants
in connection with the sale
of the assets of Borg Adaptive
Technologies 818 818
Preferred stock dividends (685) (685)
Net loss for the year
ended December 31, 2000 (21,921) (21,921)
---------- ------ ------ ----- ------- --------- --------
Balances, December 31, 2000 35,478,489 $1,773 8,222 $ - $71,529 ($80,828) ($7,526)
========== ====== ====== ===== ======= ========= ========
(a) In connection with the redemption of Series B Convertible Preferred Stock
during 1998, $1 million of the remaining Series B was exchanged for Series C
Convertible Preferred Stock. During July 2000, 3,000 shares of the Series C
Convertible Preferred Stock were converted into 3,000,000 shares of common stock
under an automatic conversion feature.
See Report of Certified Public Accountants and accompanying notes
to consolidated financial statements
37
nSTOR TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
=====================================
(in thousands)
Years Ended December 31,
-----------------------------
2000 1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES: --------- --------- ---------
Net loss ($21,921) ($18,704) ($10,407)
Adjustments to reconcile net loss to
net cash used by operating activities:
Gain on sale of assets of Borg Adaptive
Technologies (5,575) - -
Depreciation and amortization 4,468 3,355 1,352
Impairment of goodwill 11,959 4,588 -
Loss on extinguishment of debt - 465 -
Provision for inventory obsolescence 3,988 306 1,354
Provision for uncollectible accounts receivable 912 954 837
Amortization of deferred compensation - 171 44
Amortization of deferred loan costs 21 621 140
Minority interest in net loss of
consolidated subsidiary - 130 -
Changes in assets and liabilities,
net of effects from acquisition:
Decrease in accounts receivable 2,108 640 564
(Increase)decrease in inventories (2,875) 1,459 (805)
Decrease (increase) in prepaid expenses
and other 293 334 (112)
(Decrease)increase in accounts payable
and other liabilities (2,807) 403 (3,453)
------- ------- -------
Net cash used by operating activities (9,429) (5,278) (10,486)
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net proceeds from sale of assets of Borg Adaptive
Technologies 7,013 - -
Cash paid for acquisitions, net of cash acquired (293) (1,372) (379)
Additions to property and equipment (853) (767) (456)
------- ------- -------
Net cash provided (used) by investing activities 5,867 (2,139) (835)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments from revolving bank credit
facilities (1,025) (2,590) (1,507)
Additions to other borrowings 4,858 7,075 10,803
Repayments on other borrowings (2,285) (1,200) (3,424)
Issuance of convertible preferred
stock in private placements - 1,962 5,928
Redemption of convertible preferred stock - - (2,420)
Issuance of common stock, net of issuance cost 961 1,000 -
Proceeds from exercise of stock options and
warrants 1,178 2,519 1,675
Decrease in restricted cash and cash equivalents - - 503
Cash paid for preferred stock dividends (761) (823) (151)
------- ------- -------
Net cash provided by financing activities 2,926 7,943 11,407
------- ------- -------
Net (decrease) increase in cash and cash
equivalents during the year (636) 526 86
Cash and cash equivalents at beginning of year 673 147 61
------ ------ ------
Cash and cash equivalents at end of year $ 37 $ 673 $ 147
====== ====== ======
38
nSTOR TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
=====================================
(in thousands) (concluded)
Years Ended December 31,
---------------------------
2000 1999 1998
-------- -------- -------
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Cash paid during period for interest $ 1,297 $ 941 $ 807
======= ======= =======
NON-CASH INVESTING ACTIVITIES:
Acquisitions:
Fair value of assets acquired $ 2,938 $30,527 $ 527
Liabilities assumed and incurred (45) (16,667) -
Notes issued - (5,100) -
Series F Convertible Preferred Stock issued - (4,654) -
Common stock issued or committed (2,600) (2,534) -
Warrant issued to seller - (200) (148)
------- ------- -------
Cash paid $ 293 $ 1,372 $ 379
======= ======= =======
Modification of stock options and warrants
in connection with the Sale of Borg Adaptive
Technologies $ 818 $ - $ -
======= ======= =======
NON-CASH FINANCING ACTIVITIES:
Issuance of common stock in satisfaction
of borrowings $ 1,250 $ 6,840 $ -
======= ======= =======
Issuance of preferred stock in satisfaction
of borrowings $ 2,000 $ 1,500 $ 2,991
======= ======= =======
Deferred loan costs arising from issuance
of warrants under loans $ - $ 791 $ 427
======= ======= =======
Embedded dividend attributable to beneficial
conversion privilege of Convertible
Preferred Stock:
Series B $ - $ - $ 1,045
Series A - 181 173
Series E - 151 -
------- ------- -------
$ - $ 332 $ 1,218
======= ======= =======
See Report of Certified Public Accountants and accompanying notes to
consolidated financial statements.
39
nSTOR TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
==========================================
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of nStor
Technologies, Inc. and all wholly-owned subsidiaries (collectively, the
"Company"). Significant intercompany balances and transactions have been
eliminated in consolidation.
Basis of Presentation
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. This contemplates the
realization of assets and the satisfaction of liabilities in the normal course
of business. As shown in the consolidated financial statements, the Company has
suffered substantial recurring net losses of $21.9 million, $18.7 million and
$10.4 million for the years ended December 31, 2000, 1999 and 1998,
respectively, has negative working capital and a shareholders' deficit at
December 31, 2000, and is in default under its existing bank credit facility.
These matters, among others, raise substantial doubt about the Company's ability
to continue as a going concern.
In early 2000, in an effort to bring the Company to profitability, the Company
successfully recruited a new executive management team. During most of 2000, the
management team formulated and implemented its current product strategy centered
around its NexStor 2u line of SAN-ready storage solutions. This strategy
included the transition from the Company's older technology legacy products to
the newer technology solutions, which the Company began shipping in the third
quarter of 2000. During the second half of the year, the decline in revenues of
the Company's older products exceeded the increase in sales of its newer
technology solutions, which contributed to the Company's operating loss.
However, the Company has recently experienced growth in its indirect customer
channel base (original equipment manufacturers (OEM's), value added resellers
(VARs) and system integrators). Since October 2000, the Company has announced
that it has entered into various agreements with domestic and international
OEM's, VARs and system integrators. In addition, the Company has received
indications of approval from a number of other indirect customers. In 2000,
indirect sales represented a small percentage of the Company's total sales
revenues. In an effort to capitalize on this growth trend and simultaneously
reduce operating costs, the Company recently has shifted its sales and marketing
strategy to provide an emphasis on the Company's indirect sales function. As
part of this strategy, since January 2001, the Company has reduced its direct
sales personnel and related costs, and has begun to focus its direct sales team
to certain designated markets. The Company's operating results are expected to
be positively affected by an increase in indirect sales; however, there is no
assurance that an increase will occur.
Historically, the Company has been successful in securing significant amounts of
equity and debt financing to support its operating deficits. Since late 1997 and
through March 27, 2001, the Company obtained net cash proceeds of $36.1 million
from private investors, including $4.4 million, principally in convertible
notes, since December 31, 2000. Of these amounts, $12.4 million was received
from H. Irwin Levy, the Company's Chairman of the Board and a principal
shareholder, or companies controlled by Mr. Levy (collectively, Mr. Levy).
Additional cash of approximately $7 million was obtained during January 2000
when the Company sold substantially all the assets of its wholly-owned
subsidiary, Borg Adaptive Technologies, Inc. (see Note 3 to Consolidated
Financial Statements).
40
The Company is currently exploring various alternatives for raising additional
debt or equity capital to finance its short-term and long-term plans as well as
operating deficits expected to be incurred until it begins to generate positive
operating cash flows. The Company expects to be able to obtain sufficient funds
to satisfy its working capital needs during the next twelve months, as presently
contemplated. However, due to conditions in the technology-related financial
markets and other uncertainties, many of which are outside the Company's
control, there can be no assurance that such required additional funds will be
available on terms acceptable to management, if at all, or that the Company will
be able to generate positive cash flows from operations in the future.
As of December 31, 2000, the Company was not in compliance with its minimum net
worth and net income covenants under its existing bank credit facility, is in
technical default, and is currently in discussions with the lender to amend
those covenants. Although management believes it will be successful in these
discussions, there can be no assurance of this success nor that management will
be successful in obtaining a replacement lender with acceptable terms if the
Company is not successful.
The consolidated financial statements do not include any adjustments to reflect
the possible future effects on the recoverability and classification of assets
or the amounts and classification of liabilities that may result from the
inability of the Company to continue as a going concern.
Business
The Company is engaged as a manufacturer and supplier of highly integrated,
enterprise-class storage solutions for computing operations that include Windows
NT and Windows 2K, UNIX, and Linux platforms. Designed for storage-intensive
environments such as the Internet or other mission-critical applications, the
Company's products include Fibre Channel storage enclosures, in addition to a
complete set of SCSI (Small Computer Systems Interface), tape and storage
management solutions.
Cash and Cash Equivalents
Cash and cash equivalents consist of highly liquid investment instruments with
original maturities, when purchased, of three months or less.
Inventories
Inventories, consisting of raw materials, work-in-process and finished goods,
are stated at the lower of cost or market, with cost being determined based on
the first-in, first-out (FIFO) method. Reserves are recorded as necessary to
reduce obsolete inventory to estimated net realizable value (see Note 4 to
Consolidated Financial Statements).
Revenue Recognition
Revenue from the sale of products is recognized as of the date shipments are
made to customers, net of an allowance for returns. Revenue related to extended
warranty contracts is deferred and recognized over the period in which costs are
expected to be incurred, based upon historical evidence, in performing services
under the contracts. The Company also contracts with outside vendors to provide
services relating to various on-site warranties which are offered for sale to
customers; on-site warranty revenues and amounts paid in advance to outside
service organizations are recognized in the financial statements in sales and
cost of goods sold, respectively, over the warranty period.
41
Warranty Costs
A provision is made for warranty costs in excess of those provided for by the
original equipment manufacturer.
Long-Lived Assets
The Company has adopted the provisions of SFAS 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of".
This statement requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided under the
straight-line method over the estimated useful lives, principally five years.
Leasehold improvements are amortized on a straight-line basis over the shorter
of the useful life of the asset or the lease term.
Goodwill and Other Intangible Assets
Intangible assets, substantially goodwill, are carried at cost and amortized
under the straight-line method generally over seven years, the estimated useful
lives. Goodwill represents the excess cost of the acquired businesses over the
fair value of net assets acquired (see Notes 2 and 4 to Consolidated Financial
Statements). Management periodically reviews goodwill to determine if an
impairment has occurred. Among various considerations, this process includes
evaluating recoverability based upon cash flow forecasts. During the fourth
quarters of 2000 and 1999, the Company recorded goodwill write-downs of
approximately $12 million and $4.6 million, respectively. These write-downs
eliminated all remaining unamortized goodwill related to the 1999 acquisition of
Andataco, Inc. (Andataco) and the 1996 acquisition of Parity Systems, Inc.
(Parity). The goodwill was determined to have been impaired because of the
Company's inability to generate sufficient future operating income from the
assets acquired in those acquisitions. At December 31, 2000, unamortized
goodwill of $2.4 million was not considered to be impaired.
Research and Development Costs
Research and development costs are expensed as incurred.
Income Taxes
Income taxes are provided on the liability method whereby deferred tax assets
and liabilities are recognized for the expected tax consequences of temporary
differences between the tax bases and reported amounts of assets and
liabilities. Deferred tax assets and liabilities are computed using enacted tax
rates expected to apply to taxable income in the years in which temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities from a change in tax rates is recognized in income in the
period that includes the enactment date. The Company provides a valuation
allowance for certain deferred tax assets, if it is more likely than not that
the Company will not realize tax assets through future operations.
42
Net Loss Per Common Share ("EPS")
Basic EPS is calculated by dividing the loss available to common shareholders by
the weighted average number of common shares outstanding for the period, without
consideration for common stock equivalents. Diluted EPS includes the effect of
potentially dilutive securities. For all periods presented, the effect of
including dilutive securities would have been antidilutive. Accordingly, basic
and diluted EPS for all periods presented are the same.
As of December 31, 2000 and 1999, outstanding potentially dilutive securities
included the following, respectively: 3,407,199 and 9,884,666 shares underlying
convertible preferred stock; 4,549,610 and 4,622,997 shares underlying stock
options; 2,575,133 and 1,949,972 shares underlying warrants; and 283,479 shares
underlying various other commitments for 1999.
Use of Estimates
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
the reported amounts of revenues and expenses during the reporting period.
Actual results could materially differ from those estimates.
Financial Instruments
SFAS No.107, "Disclosures about Fair Value of Financial Instruments", requires
disclosure of fair value information about financial instruments. Fair value
estimates discussed herein are based upon certain market assumptions and
pertinent information available to management as of December 31, 2000 and 1999.
The respective carrying value of certain on-balance-sheet financial instruments
approximated their fair values. These financial instruments include cash and
cash equivalents, accounts receivable, accounts payable and accrued liabilities.
Fair values were assumed to approximate carrying values for these financial
instruments since they are short term in nature and their carrying amounts
approximate fair values or they are receivable or payable on demand. The fair
value of the Company's current borrowings and long-term debt is estimated based
upon quoted market prices for the same or similar issues or on the current rates
offered to the Company for debt of the same remaining maturities. The carrying
value approximates the fair value of current borrowings and long-term debt.
Dependence on Suppliers
The Company has and will continue to rely on outside vendors to manufacture
certain subsystems and electronic components and subassemblies used in the
production of the Company's products. Certain components, subassemblies,
materials and equipment necessary for the manufacture of the Company's products
are obtained from a sole supplier or a limited group of suppliers. The Company
performs ongoing quality and supply evaluation reviews with its outside vendors.
Supply, delivery and quality of subsystems and electronic components and
subassemblies have been adequate to fulfill customer orders and management does
not expect any vendor problems in the next twelve months.
43
Reclassifications
Certain prior years' amounts have been reclassified to conform to the current
year's presentations. These reclassifications had no impact on operating results
previously reported.
Comprehensive Income
Effective April 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" (SFAS 130). SFAS 130
establishes new rules for the reporting and display of comprehensive income
(loss) and its components in a full set of general-purpose financial statements.
The Company had no other comprehensive income (loss) for all periods presented.
New Accounting Pronouncements
In June 2000, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 138 "Accounting for Certain
Derivative Financial Instruments and Hedging Activities", which amends SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133 was previously amended by SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective date of FASB
Statement No. 133," which deferred the effective date of SFAS No. 133 to fiscal
years commencing after June 15, 2000. The Company currently does not engage in,
nor does it expect to engage in, derivative or hedging activities and,
accordingly, the Company anticipates there will be no impact to its consolidated
financial statements.
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition", summarizes the
Securities and Exchange Commission's views on applying generally accepted
accounting principles to revenue recognition in financial statements.
Significant views addressed relate to shipping terms, customer acceptance and
bundled service contracts. Implementation is effective for the first quarter of
fiscal 2001. The Company believes that its current revenue recognition policies
comply with SAB No. 101.
In March 2000, the FASB issued Interpretation NO 44 ("FIN 44") "Accounting for
Certain Transactions Involving Stock Compensation", which addresses certain
accounting issues that arose under the previously established accounting
principles relating to stock-based compensation. The adoption of this
interpretation did not have a material effect on the Company's financial
position or results of operations.
(2) ACQUISITIONS
Andataco, Inc.
On June 8, 1999, the Company purchased approximately 76% of the total issued and
outstanding stock of Andataco from affiliates of W. David Sykes (Mr. Sykes), the
then President of Andataco, for $5.1 million. The purchase price was paid in the
form of 9.5% promissory notes, due on June 17, 2004 (see Note 15 to Consolidated
Financial Statements). Andataco was a developer, manufacturer, and marketer of
high performance, high availability information storage solutions for the open
systems market.
44
As part of the acquisition of Andataco, the Company also acquired from Mr.
Sykes, a promissory note in the original principal amount of $5.2 million
payable by Andataco to Mr. Sykes. The purchase price for the promissory note
was: $.5 million in cash; 4,654 shares of the Company's Series F Convertible
Preferred Stock convertible into an aggregate of 1,551,333 shares of the
Company's common stock based on a conversion price of $3.00 per share; and
three-year warrants to purchase an additional 155,133 shares of the Company's
common stock for $3.30 per share valued at $.2 million based on the
Black-Scholes option-pricing model.
On November 2, 1999, the Company acquired the remaining shares of Andataco by
exchanging approximately 924,000 shares of the Company's common stock (valued at
approximately $1.8 million) for the remaining shares of common stock held by
Andataco shareholders.
The acquisitions, with an aggregate purchase price of $14.4 million, including
$1.6 million in acquisition costs, were accounted for under the purchase method
of accounting, with assets acquired and liabilities assumed recorded at
estimated fair values as of the respective acquisition dates. Effective with the
initial acquisition in June 1999, the operating results of Andataco were
included in the Company's consolidated financial statements. The excess of the
purchase price over the fair value of net assets acquired (goodwill) aggregated
approximately $14.7 million and was being amortized on a straight-line basis
over seven years. During the fourth quarter of 2000, the Company recorded an
impairment of all unamortized goodwill related to the Andataco acquisition (see
Note 1 to Consolidated Financial Statements).
The following are unaudited pro forma results of operations as if the
acquisition of Andataco had occurred at the beginning of the fiscal years ended
December 31, 1999 and 1998 (in thousands except for per share data):
December 31
------------------------------------------------------
1999 1998
------------------------------------------------------
Pro Forma Pro Forma
Historical Combined Historical Combined
---------- --------- ---------- -----------
Net Sales $ 41,089 $ 65,338 $ 18,026 $ 95,545
Loss before preferred
dividends and
extraordinary loss $ (18,239) $(20,104) $ (10,407) $ (12,673)
Net loss available to
common stock $ (19,938) $(22,110) $ (11,888) $ (14,956)
Basic and diluted
net loss per share $ (0.89) $ (0.95) $ (0.63) $ (0.77)
Average number of common
shares outstanding,
basic and diluted 22,505,804 23,320,333 18,888,911 19,435,911
These pro forma results may not be indicative of the results of operations that
would have been reported if the transaction had occurred as of these dates.
OneofUs
On January 19, 2000, the Company acquired substantially all of the assets of
OneofUs Company Limited (OneofUs) for an aggregate purchase price of $2.9
million, consisting of $.3 million cash and 776,119 shares of the Company's
common stock with an aggregate value of $2.6 million (based on the average of
the closing prices of the Company's stock during the ten (10) trading days ended
January 19, 2000). The shares were issued to four selling stockholders pursuant
to employment agreements or a confidentiality, noncompetition and
nonsolicitation agreement. OneofUs was a Taiwan-based, privately-held designer
of high performance Fibre Channel controllers and storage solutions for open
systems and the SAN market.
45
The acquisition of OneofUs was accounted for using the purchase method of
accounting with goodwill of $2.8 million recorded, which is being amortized on a
straight-line basis over seven years. The pro forma effect of this acquisition
was not material to the results of operations for all periods presented.
(3) GAIN ON SALE OF ASSETS OF BORG ADAPTIVE TECHNOLOGIES
On January 10, 2000, the Company sold substantially all of the assets of Borg
Adaptive Technologies, Inc., a wholly-owned subsidiary of the Company, to a
wholly-owned subsidiary of QLogic Corporation, for $7.5 million cash (the "Borg
Sale"). The net book value of assets sold totaled $.6 million and included all
of the intellectual property rights relating to the Company's Adaptive RAID
(Redundant Array of Independent Disks) technology, including software, patents
and trademarks, and certain tangible assets, including test and office equipment
and tenant improvements, subject to the right of the Company to the use of all
intellectual property for its own use. In connection with the Borg Sale, the
Company recorded transaction costs of $.5 million and a gain of $5.6 million,
which is net of compensation expense of $.8 million resulting from modifications
to certain stock options and warrants. The Borg division operating costs were $1
million and $.7 million in 1999 and 1998, respectively.
(4) BALANCE SHEET COMPONENTS (in thousands)
Substantially all assets are pledged as collateral for indebtedness (see Note 6
to Consolidated Financial Statements).
December 31,
-----------------
2000 1999
------- -------
Accounts Receivable
Trade receivables $ 4,610 $ 8,759
Less allowance for doubtful accounts (402) (1,604)
------- -------
4,208 7,155
Other receivables 187 171
------- -------
$ 4,395 $ 7,326
======= =======
Prepaid Expenses and Other
Prepaid service costs $ 1,175 $ 1,174
Other 103 440
------- ------
$ 1,278 $ 1,614
======= ======
Inventories
Raw materials $ 3,784 $ 4,942
Work-in-process 213 454
Finished goods 1,177 892
------- -------
$ 5,174 $ 6,288
======= =======
During the fourth quarter of 2000, the Company recorded a write-down of $1.4
million resulting from a re-valuation of certain inventory (see Note 16 to
Consolidated Financial Statements).
46
December 31,
-----------------
2000 1999
------- -------
Property and Equipment
Computer equipment $4,888 $ 4,075
Computer software 770 770
Leasehold improvements 866 788
Furniture, fixtures and office equipment 321 465
Other 122 310
------- -------
6,967 6,408
Less accumulated depreciation (4,583) (2,932)
------- -------
$ 2,384 $ 3,476
======= =======
Depreciation expense amounted to approximately $1.9 million and $1.8 million for
the years ended December 31, 2000 and 1999, respectively.
Goodwill and Other Intangible Assets
Goodwill $ 2,797 $15,497
Intellectual assets - 347
-------- --------
2,797 15,844
Less accumulated amortization ( 400) (1,311)
-------- --------
$ 2,397 $14,533
======== ========
Amortization of goodwill and other intangible assets amounted to approximately
$2.6 million and $1.6 million for the years ended December 31, 2000 and 1999,
respectively. During the fourth quarter of 2000 and 1999, the Company recorded
an impairment of goodwill of $12 million and $4.6 million, respectively (See
Note 1 to Consolidated Financial Statements).
Accounts Payable and Other
Accounts payable $ 6,402 $ 8,072
Accrued expenses and other 3,102 3,616
-------- --------
$ 9,504 $11,688
======== ========
(5) INCOME TAXES
The Company accounts for income taxes in accordance with SFAS 109, which
requires recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Under the SFAS 109 asset and liability method,
deferred tax assets and liabilities are determined based upon the difference
between the financial statement and tax bases of assets and liabilities using
enacted tax rates in effect for the year(s) in which the differences are
expected to reverse.
A reconciliation of the provision for income taxes to the amount computed by
applying the statutory federal income tax rate to income before income taxes
follows (dollars in thousands):
47
Years Ended December 31,
---------------------------------
2000 1999 1998
-------- -------- --------
Amount computed at federal statutory
rate of 34% ($7,453) ($6,359) ($3,538)
Write-down of unamortized goodwill not
deductible for tax 4,065
Amortization of non-deductible in-
tangible assets 840 533 -
Expenses not deductible for tax
purposes 62 159 79
Losses not deductible for tax purposes 425 158 -
Exercise of non-qualified stock options (44) (272) -
Losses for which no current benefits
are available 2,105 5,781 3,459
--------- -------- --------
Provision for income taxes $ - $ - $ -
========= ======== ========
The tax effects of temporary differences that gave rise to significant portions
of deferred tax assets are as follows (in thousands):
December 31,
-----------------
2000 1999
------- --------
Deferred tax assets:
Net operating loss carryforwards $14,128 $12,295
Alternative minimum tax carryforwards 770 770
Research and development credit
carryforwards 1,244 1,422
Depreciation and amortization (152) 1,571
Allowance for doubtful accounts 137 546
Inventory and warranty reserves 1,786 860
------- -------
Net deferred tax assets 17,913 17,464
Less valuation allowance (17,913) (17,464)
------- -------
Deferred taxes $ - $ -
======= =======
At December 31, 2000 and 1999, a 100% valuation allowance has been provided on
the total deferred income tax assets because it is more likely than not that the
net operating loss carryforwards will not be realized based on recent operating
results.
As of December 31, 2000, there were unused net operating loss carryforwards (the
"NOL's") for regular federal tax purposes of approximately $41 million and
approximately $8.3 million for California tax purposes expiring from 2012
through 2020 and 2001 through 2005, respectively. In addition, the Company has
research and development tax credit carryforwards of approximately $1.2 million,
which expire from 2002 through 2018 and, in conjunction with the Alternative
Minimum Tax ("AMT") rules, the Company has available AMT credit carryforwards of
approximately $.8 million at December 31, 2000, which may be used indefinitely
to reduce regular federal income taxes.
The acquisition of Andataco in 1999 caused a change in ownership for income tax
purposes. Under Internal Revenue Code Section 382, the usage of approximately $8
million of Andataco's federal NOL carryforwards and approximately $2 million of
the California NOL carryforwards will be limited annually to approximately $.4
million. The usage of Andataco's tax credit carryforwards is also subject to
limitation because of the change in ownership.
48
(6) BORROWINGS
Revolving Credit Facility ("Bank Line of Credit")
The Bank Line of Credit, as amended, provides for borrowings based on the lesser
of $10 million or: (i) 85% of eligible accounts receivable, as defined, plus
(ii) the lesser of $1.75 million or 23% of eligible inventory, as defined.
Effective April 14, 2000, interest under the Bank Line of Credit was increased
from prime plus .5% to prime (9.5% at December 31, 2000) plus 1.5%. The Bank
Line of Credit matures in April 2002, requires a facility fee of .25% based on
the average unused portion of the maximum borrowings, contains a default
interest rate provision of 2%, is collateralized by substantially all of the
Company's assets, and provides for certain financial covenants, including
minimum net worth and net income requirements. As of December 31, 2000, the
outstanding balance of the Bank Line of Credit was $4.1 million and
approximately $.5 million of additional borrowings were available based on
eligible collateral. The weighted interest rate on the Bank Line of Credit was
10.2% and 8.7% for the years ended December 31, 2000 and 1999, respectively.
At December 31, 2000, the Company was not in compliance with the minimum net
worth and net income requirements and is in technical default under the
compliance provisions of the Bank Line of Credit. The Company is currently in
discussions with the lender to amend the financial covenants. Management
believes it will be successful in such discussions, however, there can be no
assurance of this success nor that management would be successful in finding a
replacement lender with acceptable terms.
Director Loans
At December 31, 1999, current borrowings included $1.6 million due Mr. Levy,
which was paid off and satisfied in full in January 2000. Between June and
December 2000, Mr. Levy advanced an additional $4.4 million to the Company. Of
these amounts, the Company repaid $.7 million and satisfied $2 million by
issuing 2,000 shares of the Company's Series G Preferred Stock with a face
amount of $2 million (see Note 10 to Consolidated Financial Statements). At
December 31, 2000, long-term debt included $1.7 million due to Mr. Levy, the
maximum amount available under a revolving basis with interest at 10% per annum,
payable quarterly and scheduled to mature on January 31, 2002. Aggregate
interest expense paid to Mr. Levy was $134,000, $112,000 and $217,000 for the
years ended December 31, 2000, 1999 and 1998, respectively.
Subsequent to December 31, 2000 and through March 27, 2001, Mr. Levy advanced an
additional $1.9 million.
At December 31, 1998, current borrowings included $.3 million due to Mr. Levy.
During 1999, Mr. Levy advanced an additional $3.6 million to the Company. Of
those amounts, the Company satisfied $.8 million by issuing 395,000 shares of
the Company's common stock and satisfied $1.5 million by issuing 1,500 shares of
the Company's Series E Convertible Preferred Stock with a face amount of $1.5
million (see Note 10 to Consolidated Financial Statements) leaving $1.6 million
due to Mr. Levy at December 31, 1999, the maximum amount available under a
revolving basis with interest at 10% per annum.
In connection with various loans made to the Company by Mr. Levy during 2000,
effective December 29, 2000, the Company issued a warrant to Mr. Levy to
purchase 200,000 shares of common stock, exercisable immediately at $2.00 per
share, expiring in December 2003.
49
Long-Term Debt
Notes Payable
At December 31, 2000, notes payable included the following: (i) $5.1 million in
promissory notes issued to affiliates of Mr. Sykes (the former majority
shareholder of Andataco) in connection with the Andataco acquisition, bearing
interest at 9.5% per annum, and scheduled to mature in June 2004; and (ii) a $.5
million promissory note payable to a private investor bearing interest at 10%
per annum, payable quarterly and maturing on January 31, 2002.
In December 1999, the Company issued 1,878,462 shares of its common stock in
full satisfaction of $5.5 million of long-term debt, including 338,462 shares of
common stock in full satisfaction of $1 million due to Mr. Levy; 42,308 shares
of common stock in full satisfaction of $.1 million due to a company controlled
by Mark Levy, Mr. Levy's son and a director of the Company until January 2000;
42,308 shares of common stock in full satisfaction of $.1 million due to a
company controlled by another member of the Levy family; and 84,615 shares of
common stock in full satisfaction of $.3 million due to Bernard Green, a
director of the Company (Mr. Green). On the date of satisfaction, the
unamortized discount on the notes was $.5 million, which was recorded as an
extraordinary loss on extinguishment of debt. The remaining long-term debt
amounted to $1.2 million at December 31, 1999, bore interest at 10% per annum
and was scheduled to mature on September 5, 2001. In April and December 2000,
those notes were satisfied in full by the issuance of 439,154 shares of the
Company's common stock.
In connection with the issuance of $5 million of long-term debt in 1998 and $1.8
million in 1999, the Company issued warrants to purchase 2,266,666 shares
(600,000 in 1999 and 1,666,666 in 1998) of the Company's common stock including
warrants to purchase 333,332 shares of the Company's common stock to Mr. Levy;
warrants underlying 41,666 shares to Mark Levy; 41,667 shares to companies
controlled by another member of the Levy family; and 83,333 shares to Mr. Green.
The warrants were valued under the Black-Scholes option-pricing model as of
their respective dates of issuance at an aggregate of $1.2 million and were
recorded as a discount to the long-term debt, of which $21,000, $582,000 and
$137,000 was amortized as interest expense for the years ended December 31,
2000, 1999 and 1998, respectively.
Convertible Notes
Certain convertible notes with a face amount of $400,000 and accrued interest of
$229,000 matured in May 2000. The Company has, at various times, attempted to
locate the debtor. The Company has reclassified this liability to accounts
payable and other at December 31, 2000.
50
Maturities
Scheduled and estimated maturities of the Company's borrowings are as follows
(in thousands):
Years ending December 31,
2001 $4,086
2002 2,158
2003 -
2004 5,100
2005 -
------
Total payments 11,344
Less current portion (4,086)
------
Long-Term portion $7,258
======
(7) SEGMENT INFORMATION AND SIGNIFICANT CUSTOMERS
The Company operates predominantly in one business segment, information storage
solutions. The Company's customers include end users, original equipment
manufacturers, integrators and value added resellers. Financial instruments
which potentially subject the Company to concentrations of credit risk are
primarily accounts receivable. The Company performs ongoing credit evaluations
of its customers, generally requires no collateral and maintains allowances for
potential credit losses and sales returns. During fiscal 2000, no single
customer accounted for more than 10% of sales; however, during fiscal 1999 and
1998, sales to two customers accounted for 15% and 11%, and 27% and 13%,
respectively. Sales to geographic areas other than the United States have not
been significant.
(8) COMMITMENTS AND CONTINGENCIES
Litigation
In June 1996, Jack Ehrenhuas, Mark Schindler, Eugene Stricker, Amnon Damty, Ehud
Mendelson and Susan Felton filed a Complaint in the Supreme Court of the State
of New York, County of Nassau, against the Company and Michael Wise, its then
Chairman of the Board and currently a director. The plaintiffs claim to have
contractual and proprietary interests in the prospect of a transaction to
purchase certain net assets acquired by the Company and seek compensatory
damages plus punitive damages.
In August 1996, The Nais Corporation, Mark Schindler, Eugene Stricker, Amnon
Damty, Ehud Mendelson and Susan Felton filed a Complaint in the same Court
making similar allegations against a subsidiary of the Company, its then
president, R. Daniel Smith (Mr. Smith), and a company controlled by Mr. Smith.
In this action, the plaintiffs seek compensatory damages plus punitive damages
for alleged breach of contract.
Both cases are currently in discovery. Counsel for the Company believes that the
Company has good defenses to both claims and that it will not incur any material
liability. The Company is unaware of any facts that would support any of the
plaintiffs' claims and, accordingly, the Company believes that the claims are
without merit.
From time to time, the Company is subject to legal proceedings and other claims
arising in the ordinary course of business. In the opinion of management, the
Company is not a party to any litigation the outcome of which would have a
material adverse effect on its business or operations or cash flows.
51
Executive Management
On January 20, 2000, the Company entered into a letter agreement with Harris
Ravine (Mr. Ravine), the former Chief Executive Officer of the Company's
Andataco subsidiary, relating to the termination of his employment. Pursuant to
the agreement, the Company issued 80,000 shares of common stock to Mr. Ravine
and paid him $10,000 in cash.
On January 26, 2000, the Company entered into a termination agreement with
Lawrence F. Steffann (Mr. Steffann), the Company's former President, relating to
the termination of his employment. Pursuant to the agreement, the Company issued
43,479 shares of common stock to Mr. Steffann and paid him approximately $27,000
in cash.
Effective January 17, 2000, Larry Hemmerich (Mr. Hemmerich) was appointed the
Company's new President and Chief Executive Officer. In connection with this
appointment, the Company entered into a two-year employment agreement with Mr.
Hemmerich, providing for an annual base salary of $325,000, a $125,000 bonus in
the first year and a bonus based upon meeting certain objectives set by the
Board of Directors in the second year. On October 18, 2000, the Company and Mr.
Hemmerich agreed to extend the term of his employment agreement to January 16,
2003. In connection with the first year bonus, on January 17, 2001, the Company
issued a $125,000, 10% note to Mr. Hemmerich, payable on June 30, 2001.
(9) COMMON STOCK
In January 2000, the Company issued 776,119 shares of the Company's common stock
as part of the purchase price of the assets of OneofUs (see Note 2 to
Consolidated Financial Statements).
In January 2000, the Company issued 123,479 shares of the Company's common stock
in connection with severance agreements with former officers of the Company.
In February 2000, all 1,667 outstanding shares of the Company's Series A
Convertible Preferred Stock were converted into 1,666,667 shares of common stock
at a conversion price of $.60 per share. In addition, 700 shares of the
Company's Series D Convertible Preferred Stock were converted into 700,000
shares of common stock, also at a $1.00 per share.
On May 4, 2000, the Company entered into an agreement with a private investment
group granting the Company a one-year $15 million equity line or equity draw
down facility. The agreement does not obligate the Company to draw any of the
funds. Once per draw down period, the Company may request a draw of up to $5
million, subject to a formula based on average stock price and average trading
volume, setting the maximum amount of any request for any given draw. The amount
of money that the investment group will provide to the Company and the number of
shares the Company will issue to the investment group in return for that money
is settled on a weekly basis during a 22 day trading period following the draw
request based on a formula as defined in the stock purchase agreement. The
investment group receives a 7% discount to the market price for the 22-day
period and the Company receives the settled amount of the draw down less a 4%
fee payable to the placement agent.
In connection with this agreement, the Company granted the investment group and
the placement agent three year warrants to purchase an aggregate of 220,000
shares of the Company's common stock at an exercise price of $3.60 per share,
representing 120% of the average of the closing prices of the Company's common
stock for the five trading days before May 9, 2000 (see Note 11 to the
Consolidated Financial Statements).
The Company registered for resale the securities to be sold pursuant to the draw
downs and warrants.
52
As of December 31, 2000, the Company had issued 508,857 shares of common stock
and received net proceeds of approximately $1 million pursuant to this
agreement. In the accompanying Statement of Stockholders' Equity, the
approximate $87,000 of transaction costs incurred to complete this agreement has
been charged to additional paid-in capital.
In July 2000, 3,000 shares of the Company's Series C Convertible Preferred Stock
were automatically converted into 3,000,000 shares of common stock at a
conversion price of $1.00 per share.
During fiscal 2000 and 1999, the Company issued 439,154 and 2,523,462 shares of
common stock, respectively (including 733,462 shares to Mr. Levy in 1999), in
full satisfaction of $1.3 million and $6.8 million, respectively, of debt.
During fiscal 2000 and 1999, 3,332 and 600 shares, respectively, of the
Company's Series F Convertible Preferred Stock were converted into 1,110,800 and
200,000 shares, respectively, of common stock at a conversion price of $3.00 per
share.
During fiscal 2000 and 1999, the Company issued 635,589 and 1,686,241 shares of
common stock, respectively, on the exercise of stock options and warrants for an
aggregate amount of $1.2 million and $2.8 million, respectively.
In April 1999, the Company issued 500,000 shares of common stock and a warrant
to purchase an aggregate of 250,000 shares of common stock at a purchase price
of $2.00 per share to a private investor, for $1 million in cash.
In November 1999, the Company acquired the remaining shares of Andataco common
stock by merging Andataco with a wholly-owned subsidiary, which had been
organized for that purpose. In the merger, the Company issued 924,118 shares of
common stock, with an aggregate value of $1.8 million, to the Andataco
shareholders in exchange for the remaining shares of Andataco common stock. As
part of the acquisition cost of Andataco, the Company issued 168,578 shares of
common stock to a financial advisor of Andataco.
With the exception of 142,858 shares of common stock issued in December 2000,
all of the foregoing shares of common stock have been registered for resale.
Pursuant to state law, the Company may be restricted from paying dividends to
its holders of common stock under certain conditions.
(10) PREFERRED STOCK
EITF 98-5 addresses accounting for preferred stock which is convertible into
common stock at a discount from the market rate at the date of issuance. In
accordance with this EITF, a preferred stock dividend, attributable to such a
beneficial conversion privilege, should be recorded for the difference between
the conversion price and the quoted market price of common stock at the date of
issuance. Accordingly, during 1999 and 1998, the Company recorded $.3 million
and $1.2 million, respectively, as an additional embedded dividend attributable
to the beneficial conversion privilege on its convertible preferred stock.
Series A
On July 7, 1998, the Company borrowed $1 million from a private investor under
an 8% Convertible Subordinated Debenture (the "Debenture"), payable on September
25, 1998, as extended. In September 1998, the Debenture was converted into 1,667
shares of the Company's 8% Convertible Preferred Stock, Series A (the "Series A
Preferred Stock").
53
The Series A Preferred Stock with a stated value of $1 million as of December
31, 1999 accrued dividends at 8% per annum, payable quarterly, and was
convertible into shares of the Company's common stock based on a fixed
conversion price of $.60 per share. On February 1, 2000, all of the Series A
Preferred Stock was converted into 1,666,667 shares of the Company's common
stock (see Note 9 to the Consolidated Financial Statements).
Series B
Effective April 14, 1998, the Company received $3.2 million in cash (net of $.3
million in issuance costs), including $1 million from Mr. Levy, from a private
placement of 8% convertible preferred stock, Series B (the "Series B Preferred
Stock"). The Series B Preferred Stock was convertible into common stock, on
various dates through April 2000, at a conversion price equal to the lesser of
$1.44 per share or 77% of the market price at the date of conversion. At
closing, the Company issued warrants to purchase 280,000 shares of the Company's
common stock (including 80,000 to Mr. Levy), exercisable at any time through
April 2001 at an exercise price of $1.50 per share.
In July and September 1998, $200,000 of the Series B Preferred Stock held by
unrelated private investors was converted into 394,949 shares of the Company's
common stock.
On October 30, 1998, the Company redeemed $2.3 million of the Series B Preferred
Stock held by unrelated private investors for approximately $2.5 million in cash
(including a premium of $.1 million and accrued dividends of $.1 million) and
warrants to purchase 300,000 shares of the Company's common stock, exercisable
upon issuance at $1.00 per share and expiring in October 2001. In conjunction
with this redemption, effective October 28, 1998, the Company issued 1,000
shares of 8% convertible preferred stock, Series C (the "Series C Preferred
Stock") with a stated value of $1 million in exchange for the remaining $1
million of Series B Preferred Stock which was held by Mr. Levy.
As a result of these two transactions, all of the Company's convertible
preferred stock that was based on a variable conversion price was redeemed
either for cash or preferred stock.
Series C
In September and October 1998, the Company satisfied $2 million of borrowings
from Mr. Levy by issuing 2,000 shares of Series C Preferred Stock with a stated
value of $2 million. Together with the $1 million of Series C Preferred Stock
issued in exchange for Series B Preferred Stock, at December 31, 1999, Series C
Preferred Stock, with a stated value of $3 million accrued dividends at 8% per
annum, payable quarterly, and was convertible into shares of the Company's
common stock based on a fixed conversion price of $1.00 per share. Effective
July 7, 2000, the Company converted the Series C Preferred Stock into 3,000,000
shares of the Company's common stock in accordance with an automatic conversion
requirement(see Note 9 to Consolidated Financial Statements).
Series D
During October 1998, the Company received $2.7 million in cash from unrelated
private investors in a private placement of 2,700 shares of its 8% convertible
preferred stock, Series D (the "Series D Preferred Stock"). Of this amount, $2.5
million was used in the redemption of the Series B Preferred Stock. The Series D
Preferred Stock with a stated value of $2 million and $2.7 million as of
December 31, 2000 and 1999, respectively, accrues dividends at 8% per annum,
payable quarterly, is convertible into shares of the Company's common stock
based on a fixed conversion price of $1.00 per share, and has an automatic
conversion feature in which each share not converted into the Company's common
stock by October 28, 2001, will be automatically converted. On February 1, 2000,
$.7 million of the Series D Preferred Stock was converted into 700,000 shares of
the Company's common stock (see Note 9 to Consolidated Financial Statements).
54
Series E
In a private placement in June 1999 of its Series E Convertible Preferred Stock
(the "Series E Preferred Stock"), the Company issued 3,500 shares for $3.5
million in cash, of which $1.5 million was in satisfaction of borrowings from
Mr. Levy, and three-year warrants to purchase an aggregate of 116,667 shares of
the Company's common stock at a price of $3.30 per share (including 50,000
shares to Mr. Levy). The Series E Preferred Stock, with a stated value of $3.5
million as of December 31, 2000 and 1999, requires quarterly dividends at the
following annual rates: 8% during the first year, 9% during the second year and
10% thereafter. The Series E Preferred Stock is convertible into shares of the
Company's common stock based on a fixed conversion price of $3.00 per share.
Series F
As part of the acquisition of Andataco in June 1999, the Company issued 4,654
shares of Series F Convertible Preferred Stock (the "Series F Preferred Stock")
to Mr. Sykes, with an original stated value of $4.7 million. The Series F
Preferred Stock is convertible into the Company's common stock based on a fixed
conversion price of $3.00 per share. During fiscal 2000 and 1999, 3,332 and 600
shares, respectively, of Series F Preferred Stock were converted into 1,110,800
and 200,000 shares, respectively, of the Company's common stock. As of December
31, 2000 and 1999, outstanding Series F Preferred Stock of $.7 million and $4.1
million, respectively, required quarterly dividends at the following annual
rates: 8% during the first year, 9% during the second year and 10% thereafter.
Series G
Effective December 29, 2000, the Company satisfied $2 million of borrowings from
Mr. Levy by issuing 2,000 shares of Series G Preferred Stock, with a stated
value of $2 million. The Series G Preferred Stock accrued dividends at 10%,
payable quarterly and was redeemable at the Company's option. Attached to the
Series G Preferred Stock was a warrant to purchase 500,000 shares of the
Company's common stock at $1.50 per share, exercisable from July 1, 2001 through
December 31, 2003 (the "Warrants"). The Warrants provided that if any portion of
the Series G Preferred Stock is redeemed by the Company prior to June 30, 2001,
a corresponding pro-rata portion of the warrant would be cancelled.
(11) STOCK OPTIONS AND WARRANTS
The Company applies APB Opinion 25, "Accounting for Stock Issued to Employees",
and related interpretations in accounting for options granted to employees under
its Option Plan (the "Plan"). Under APB Opinion 25, if options are granted at
exercise prices less than fair market value, compensation expense is recorded
for the excess of the fair market value on the date of grant over the exercise
price.
Under the Plan, qualified and nonqualified stock options to purchase up to seven
million shares of the Company's common stock may be granted to officers,
directors, key employees and non-employees. The maximum term of the options
granted under the Plan is ten years. The stock options granted under the Plan
generally vest over three to five years annually on an equal basis.
SFAS No.123, "Accounting for Stock-Based Compensation", requires the Company to
provide pro forma information regarding net income and earnings per share as if
compensation cost for stock options granted under the Plan, if applicable, had
been determined in accordance with the fair value based method prescribed in
SFAS 123. The Company estimates the fair value of each stock option at the grant
date by using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants: no dividend yield; expected lives
of five to ten years; volatility ranging from 96% to 107% for 2000, and 60% for
1999 and 1998; and risk-free interest rates ranging from 4.9% to 5.1% for 2000,
5.6% for 1999, and 5.3% for 1998.
55
Under the accounting provisions of SFAS 123, the Company's net loss and loss per
share, for the years ended December 31, 2000, 1999 and 1998 would have been
reduced to the pro forma amounts indicated below (in thousands, except per
share):
Years Ended December 31,
------------------------------
2000 1999 1998
-------- -------- --------
Net loss attributable
to common
shareholders:
As reported ($22,606) ($19,938) ($11,888)
Pro forma ($24,112) ($20,108) ($12,317)
Loss per share:
As reported ($.69) ($.89) ($.63)
Pro forma ($.73) ($.89) ($.65)
Changes in options outstanding are summarized as follows:
Weighted- Weighted-
Average Average
Exercise Fair Value Per
Shares Price Share of Options
(in thousands) Per Share Granted
-------------- ---------- ----------------
Balance, January 31, 1998 1,765 2.48
Granted - exceeded
market value 1,160 1.14 .52
Granted - equal to
market value 881 1.38 1.03
Forfeited (860) 1.98
------ -----
Balance, December 31, 1998 2,946(a) 1.67
Granted - equal to
market value 3,453 2.23 1.60
Forfeited (958) 1.97
Exercised (818) 1.75
------ -----
Balance, December 31, 1999 4,623 2.00
Granted - equal to
market value 1,657 2.78 2.08
Granted - exceeded
market value 724 2.10 1.36
Forfeited (2,051) 1.91
Exercised (404) 1.28
------- -----
Balance, December 31, 2000 4,549 2.40
======= =====
- ----------
(a) In June 1998, the Company granted a conditional Employee Incentive Stock
Option to its then President, Lawrence F. Steffann, to purchase 750,000 shares
of the Company's common stock. The grant was conditional because of the 2.5
million share limitation under the Plan. On November 1, 1999, the shareholders
of the Company approved the amendment of the 1996 Stock Option Plan to increase
the number of shares reserved for issuance under the Plan from 2,500,000 to
7,000,000.
56
At December 31, 2000, 1999 and 1998, a total of 1,371,000, 853,000, and
1,189,000, respectively, of the outstanding options were exercisable with a
weighted-average exercise price of $2.29, $2.20, and $2.31, respectively, per
share. The number of shares available to grant under the Plan was 1,378,140 and
1,708,503 as of December 31, 2000 and 1999, respectively.
The following table summarizes information about fixed stock options at December
31, 2000:
Weighted
Weighted Average
Number Average Weighted Number Exercise
Outstanding Remaining Average Exercisable Price of
Exercise at Dec. 31, Contractual Exercise at Dec. 31, Exercisable
Prices 2000 Life Price 2000 Options
(in thousands) (in thousands)
- -------- ----------- ----------- -------- ----------- -----------
$ .50-$1.75 804 8.4 years $1.35 414 $1.35
$1.81-$2.50 2,326 8.9 years $2.24 722 $2.33
$2.56-$3.69 1,184 9.2 years $3.09 35 $2.93
$4.00-$6.31 235 6.5 years $4.13 200 $4.00
----- --------- ----- ----- -----
4,549 8.8 years $2.40 1,371 $2.29
===== ========= ===== ===== =====
At December 31, 2000, the Company had outstanding warrants under which 2,575,133
shares of common stock could be acquired. Information relating to these warrants
is summarized as follows:
Number of Warrant Price
Shares -------------------------
(in thousands) Per Share Total
----------- ------------ -----------
Balance, January 31, 1998 555 $2.10-$2.35 $1,179,000
Warrants issued 4,324 $1.00-$2.35 5,691,000
Warrants exercised (1,450) $1.00-$1.50 (1,675,000)
Warrants canceled (1,667) $1.50 (2,500,000)
---------- ----------- -----------
Balance, December 31, 1998 1,762 $1.00-$2.35 2,695,000
Warrants issued 1,122 $2.00-$3.30 3,197,000
Warrants exercised (870) $1.00-$2.10 (1,378,000)
Warrants expired (64) $2.10 (134,000)
---------- ----------- -----------
Balance, December 31, 1999 1,950 $1.25-$3.30 4,380,000
Warrants issued 920 $1.50-$3.60 1,942,000
Warrants exercised (230) $2.10-$3.00 (663,000)
Warrants expired (65) $2.35 (153,000)
---------- ------------ -----------
Balance, December 31, 2000 2,575 $1.25-$3.60 $5,506,000
========== ============ ===========
57
Number
of Shares
Subject to
Expiration Warrants Exercise
Date (in thousands) Price
---------- -------------- --------
March 2001 333 $1.25
January 2002 400 $3.00
April 2002 250 $2.00
June 2002 272 $3.30
December 2002 400 $1.38
May 2003 220 $3.60
December 2003 200 $2.00
December 2003 500 $1.50
---------
2,575
=========
As of December 31, 2000, the Company had reserved common stock for the following
purposes (in thousands):
Convertible preferred stock 3,407
1996 Stock Option Plan 5,928(a)
Stock warrants 2,575
------
11,910
======
- ----------
(a) Consists of options to purchase 4,549 shares which were outstanding, and an
additional 1,379 shares available to grant under the Plan.
(12) RELATED PARTY TRANSACTIONS
Syko Properties
The Company currently leases its San Diego corporate office from an entity owned
by Mr. Sykes, an officer of the Company until early 2000, after which date he
was no longer affiliated with the Company. The Company paid this entity
approximately $331,000 and $193,000 during the years ended December 31, 2000 and
1999, respectively, under the terms of the lease agreement.
Hilcoast Advisory Services, Inc. ("Advisor")
Commencing in October 1999, the Company has been charged $5,000 per month, plus
reimbursement of out-of-pocket expenses, from Advisor for certain financial
consulting and administrative services provided to the Company. Mr. Levy is the
Chairman of the Board, Chief Executive Officer and a majority shareholder of
Advisor's parent, and Jack Jaiven, the Company's Chief Financial Officer, is an
officer of Advisor. Management believes that the terms of this agreement were no
less favorable to the Company than those that would be received from other
sources.
58
(13) LEASES
The Company leases its operating facilities under operating leases which expire
at various dates through March 2003. At December 31, 2000, future minimum rental
payments under operating leases that have initial or remaining terms in excess
of one year were as follows (in thousands):
Total
-------
2001 $ 790
2002 538
2003 178
-------
$1,506
=======
Rent expense was $871,000, $790,000, and $513,000 for the years ended December
31, 2000, 1999 and 1998, respectively.
(14) 401(k) PLAN
The Company's 401(k) Tax Deferred Savings Plan (the "401(k) Plan") covers
substantially all employees meeting certain minimum age and service
requirements. Company contributions to the plan are determined by the Board of
Directors. The Company has made no contributions to the 401(k) Plan as of
December 31, 2000.
(15) SUBSEQUENT EVENTS
Borrowings
On January 16, 2001, Mr. Levy loaned the Company $.6 million under a promissory
note bearing interest at 10%, payable quarterly, and maturing on January 31,
2002. In February and March 2001, the Company received an additional $3.8
million in cash from private investors, under convertible promissory notes,
(including $1.3 million from Mr. Levy), bearing interest at 8%, payable
semi-annually and maturing on March 31, 2003. The notes are convertible
immediately into the Company's common stock at $1.00 per common share. In
connection with these notes, the Company issued warrants to purchase an
aggregate of 937,500 shares (including 312,500 shares to Mr. Levy), of the
Company's common stock at $1.20 per share, exercisable at issuance and expiring
on March 31, 2004.
(16) FOURTH QUARTER ADJUSTMENTS
During the fourth quarter of 2000, the Company recorded an impairment adjustment
to unamortized goodwill of $12 million (see Note 1 to Consolidated Financial
Statements). The Company also recorded a write-down of $1.4 million resulting
from a re-valuation of certain inventory, which included obsolete inventory and
components associated with products which the Company has recently decided to
phase out. Management was unable to reasonably estimate the effect, if any, of
these adjustments on prior quarters in 2000.
During the fourth quarter of 1999, the Company recorded an impairment adjustment
to goodwill of $4.6 million (see Note 1 to Consolidated Financial Statements).
The Company also recorded a write-down of $.6 million resulting from a
re-valuation of certain inventory, which included potentially obsolete inventory
and transitional issues associated with transferring the operational portion of
the business from Lake Mary, Florida to San Diego, California. Management was
unable to reasonably estimate the effect, if any, of certain of those
adjustments on prior quarters in 1999 because of the timing of completion of the
acquisition of Andataco.
59
(17) QUARTERLY RESULTS OF OPERATIONS (Unaudited)
The following is a summary of the quarterly operations for the years ended
December 31, 2000 and 1999 (in thousands).
2000 Mar. 31 Jun. 30 Sept. 30 Dec. 31
- ---- -----------------------------------------------
Sales $12,540 $10,865 $ 9,508 $ 7,284
Gross Profit 3,571 3,296 2,438 567
Loss from operations (2,658) (2,930) (3,407) (b)(17,296)
Net income (loss) (a) 2,650 (2,896) (4,028) (b)(17,647)
Income (loss) available to
common stock (a) 2,439 (3,088) (4,171) (b)(17,786)
Net income (loss) per
common stock:
Basic $ .08 ($.10) ($.12) ($.51)
Diluted $ .07 ($.10) ($.12) ($.51)
1999
- ----
Sales $ 1,411 $ 9,398 $17,546 $12,734
Gross Profit 88 1,232 5,015 3,428
Loss from operations (2,261) (3,497) (1,583) (9,160)
Loss before preferred
dividends and extraordinary
loss (2,471) (3,944) (2,047) (9,777)
Extraordinary loss - - - (465)
Net loss (2,471) (3,944) (2,047) (10,242)
Loss available to common stock (2,690) (4,358) (2,353) (10,537)
Net loss per common stock:
Basic and diluted ($ .13) ($.19) ($.10) ($.45)
- ----------
(a) Net income includes gain on sale of assets of Borg Adaptive Technologies of
$5.6 million.
(b) See Note 16 regarding Fourth Quarter Adjustments.
60
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors of
nStor Technologies, Inc.
The audits referred to in our report dated February 9, 2001, except as to Notes
6 and 15, which are as of March 27, 2001, relating to the consolidated financial
statements of nStor Technologies, Inc., which are contained in Item 8 of this
Form 10-K included the audit of the consolidated financial statement schedules
listed in the accompanying index. The consolidated financial statement schedules
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statement schedules based
upon our audits.
In our opinion, such consolidated financial statement schedules present fairly,
in all material respects, the information set forth therein.
The aforementioned consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has suffered substantial
recurring loses from operations, has a working capital deficiency, a
shareholders' deficit and is in default under its existing credit facility.
These matters, among others, raise substantial doubt about the Company's ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note 1 to the aforementioned consolidated financial
statements. The aforementioned consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
/s/ BDO SEIDMAN, LLP
BDO SEIDMAN, LLP
Costa Mesa, California
February 9, 2001, except as to
Paragraph four of Note 6 and
Note 15, which are as of March 27, 2001
61
nSTOR TECHNOLOGIES, INC.
Schedule I--Condensed Financial Information of Registrant
Fiscal Years Ended December 31, 2000 and 1999
The following represents the condensed unconsolidated balance sheet for nStor
Technologies, Inc. as of December 31, 2000 and 1999, and the condensed
unconsolidated statements of operations and cashflows for the years ended
December 31, 2000 and 1999.
CONDENSED UNCONSOLIDATED BALANCE SHEETS
(in thousands)
December 31,
ASSETS 2000 1999
- ------ ---------- ----------
Current assets:
Cash and cash equivalents $ 8 $ 466
Prepaid expenses and other - 79
---------- ----------
Total current assets 8 545
Investments in and receivables from
subsidiaries 579 14,945
Other non-current assets - 68
---------- ----------
$ 587 $ 15,558
========== ==========
LIABILITIES
- -----------
Current liabilities:
Borrowings $ 2,158 $ 2,214
Accounts payable and other 855 742
---------- ----------
Total current liabilities 3,013 2,956
Long-term debt 5,100 6,329
---------- ----------
Total liabilities 8,113 9,285
---------- ----------
SHAREHOLDERS' EQUITY
- --------------------
Preferred stock, $.01 par; 1,000,000 shares
authorized, in order of preference:
Convertible (except for Series G) preferred
stock issued and outstanding as of
December 31, 2000 and 1999, respectively:
Series F, 722 and 4,054, aggregate
liquidation value $722 and $4,054;
Series A, 0 and 1,667, aggregate
liquidation value $0 and $1,000; Series C,
0 and 3,000, aggregate liquidation
value $0 and $3,000; Series D, 2,000 and 2,700,
aggregate liquidation value
$2,000 and $2,700; Series E, 3,500
in 2000 and 1999, aggregate liquidation
value $3,500; Series G, 2,000 and 0, aggregate
liquidation value
$2,000 and $0 - -
Common stock, $.05 par; 75,000,000 shares
authorized; 35,478,489 and 26,517,824 shares
issued and outstanding at December 31, 2000
and December 31, 1999, respectively 1,773 1,331
Additional paid-in capital 71,529 63,164
Deficit (80,828) (58,222)
---------- ----------
Total shareholders' (deficit) equity (7,526) 6,273
---------- ----------
$ 587 $ 15,558
========== ==========
62
nSTOR TECHNOLOGIES, INC.
Schedule I--Condensed Financial Information of Registrant
CONDENSED UNCONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
Years Ended
2000 1999
----------- -----------
Loss from investment in subsidiaries ($20,964) ($16,137)
Other income 44 92
Selling, general and administrative expense 319 637
Interest expense 682 1,557
----------- -----------
Loss before preferred dividends and
extraordinary loss (21,921) (18,239)
Extraordinary loss from debt extinguishments
(net of tax of $0) - (465)
----------- -----------
Net loss (21,921) (18,704)
Preferred stock dividends (685) (902)
Embedded dividend attributable to beneficial
conversion privilege of convertible
preferred stock - (332)
----------- -----------
Loss available to common stock ($22,606) ($19,938)
============ ===========
63
nSTOR TECHNOLOGIES, INC.
Schedule I--Condensed Financial Information of Registrant
CONDENSED UNCONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Years Ended
2000 1999
CASH FLOWS FROM OPERATING ACTIVITIES: --------- ---------
Net loss ($21,921) ($18,704)
Adjustments to reconcile net loss to
net cash used by operating activities:
Gain on sale of assets of Borg Adaptive
Technologies (5,575) -
Amortization of deferred loan costs 21 620
Amortization of deferred compensation costs - 171
Loss of extinguishments of debt - 476
Changes in assets and liabilities, net of
effects from acquisition:
Decrease in receivables from subsidiaries 16,684 8,567
Decrease (increase) in prepaid expenses
and other 147 (141)
(Decrease) increase in accounts payable
and other liabilities (485) 188
--------- ---------
Net cash used by operating activities (11,129) (8,823)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for acquisitions (293) (1,354)
Net proceeds from sale of assets of Borg
Adaptive Technologies 7,013 -
--------- ---------
Net cash provided by investing activities 6,720 (1,354)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings 4,858 7,075
Repayments on borrowings (2,285) (1,200)
Issuance of common stock, net of issuance cost 961 1,000
Issuance of convertible preferred stock, net of costs - 1,962
Proceeds from exercise of stock options and warrants 1,178 2,519
Cash paid for preferred stock dividends (761) (823)
--------- ---------
Net cash provided by financing activities 3,951 10,533
--------- ---------
Net decrease in cash and cash equivalents during
the year (458) 356
Cash and cash equivalents at beginning of year 466 110
--------- ---------
Cash and cash equivalents at end of year $ 8 $ 466
========= =========
64
nSTOR TECHNOLOGIES, INC.
Schedule II-- Valuation and Qualifying Accounts
Fiscal Years Ended December 31, 2000, 1999 and 1998
(in thousands)
Additions
Balance Resulting Balance
at Additions from at
Beginning Charged Merger/ End of
of Year to Income Other Deductions* Year
---------- --------- --------- ----------- ---------
Allowance for Doubtful
Accounts Receivable:
2000.................. $1,604 $ 912 $ - ($2,114) $ 402
1999.................. 502 954 228 (80) 1,604
1998.................. 500 837 - (835) 502
Allowance for Inventory
Obsolescence:
2000.................. $3,419 $3,988 $ - ($2,505) $4,902
1999.................. 428 306 3,276 (591) 3,419
1998.................. 1,839 1,354 - (2,765) 428
- ---------
* Deductions represent amounts written off against the allowance, net of
recoveries.
65
Item 9. Disagreement on Accounting and Financial Disclosure
Not Applicable
PART III
Item 10. Directors and Executive Officers of the Registrant
For information concerning this item, see the text under the caption "Election
of Directors" and "Management" in our definitive Proxy Statement (the "Proxy
Statement") to be filed with respect to our 2001 Annual Meeting of Stockholders,
which information is incorporated herein by reference.
Item 11. Executive Compensation
For information concerning this item, see the text and tables under the caption
"Executive Compensation", "Report on Compensation" and the graph under the
caption "Performance Graph" in the Proxy Statement, which information is
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
For information concerning this item, see the table and text of "Security
Ownership" and "Management" in the Proxy Statement, which information is
incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
For information concerning this item, see the text under the caption "Certain
Transactions" in the Proxy Statement, which information is incorporated herein
by reference.
66
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K
(a) (1) Financial Statements - See index to Consolidated Financial
Statements at page 30 of this Form 10-K.
(2) Financial statement schedules have been omitted because
they are not required, or because the information required
therein is set forth in the Consolidated Financial Statements or
the notes thereto.
(3) Exhibits - See Exhibit Index at page 67-70 of this Form 10-K.
(b) No reports were filed or amended by the Registrant during the
fourth quarter of 2000.
67
EXHIBIT INDEX
Exhibit
Number Description
2.1 Asset Purchase Agreement, dated November 30, 1999, by and among Registrant,
nStor Taiwan, Inc., OneofUs Company Limited and certain shareholders of
OneofUs (4)
2.2 Purchase Agreement, dated March 2, 1999, by and among Registrant, W. David
Sykes and the Sykes Children's Trust of 1993 dated November 22, 1993 (11)
2.3 Amendment No. 1 to Purchase Agreement, dated April 26, 1999, by and among
Registrant, W. David Sykes, the Sykes Family Trust and the Sykes Children's
Trust of 1993 dated November 22, 1993 (12)
2.4 Amendment No. 2 to Purchase Agreement, dated April 26, 1999, by and among
Registrant, W. David Sykes, the Sykes Family Trust and the Sykes Children's
Trust of 1993 dated November 22, 1993 (12)
2.5 Merger Agreement, dated August 27, 1999, by and among Registrant, NTI
Acquisition Corp. and Andataco, Inc. (11)
2.6 Asset Purchase Agreement, dated January 10, 2000, by and among nStor
Corporation, Inc., Borg Adaptive Technologies, Inc., QLogic Acquisition
Corporation and QLogic Corporation (6)
3.1 Restated Certificate of Incorporation of Registrant, as amended (5)
3.2 Restated Bylaws of Registrant (14)
4.1 Form of Warrant, between Registrant and certain private investors(1)
4.2 Form of Subscription Agreement, between Registrant and and certain private
investors (1)
4.3 Form of Registration Rights Agreement, between Registrant and certain
private investors (1)
4.4 Warrant to purchase 200,000 shares of common stock issued to H. Irwin Levy,
dated December 29, 2000 (1)
4.5 Warrant to purchase 500,000 shares of common stock issued to H. Irwin Levy,
dated December 29, 2000 (1)
4.6 Subscription Agreement, dated December 29, 2000, between Registrant and H.
Irwin Levy (1)
4.7 Certificate of Designation of Series G Preferred Stock (1)
4.8 Registration Rights Agreement, dated December 29, 2000, between Registrant
and H. Irwin Levy (1)
4.9 Warrant to purchase common stock issued to Wishmasters, dated May 9, 2000
(3)
4.10 Warrant to purchase common stock issued to Ladenburg Thalmann, dated May 9,
2000 (3)
4.11 Common Stock Purchase Agreement between Registrant and Wishmasters, dated
May 4, 2000 (3)
68
4.12 Registration Rights Agreement between Registrant and Wishmasters, dated May
4, 2000 (3)
4.13 Form of Warrant, dated January 26, 1999, issued in connection with
Promissory Notes between Registrant and (i) Herbert Gimelstob, for 200,000
shares, (ii) Maurice Halperin, for 200,000 shares, (iii) Patrice Auld, for
100,000 shares and (iv) James P. Marden, for 100,000 shares (13)
4.14 Certificate of Designation of Series D Convertible Preferred Stock (9)
4.15 Certificate of Designation of Series E Convertible Preferred Stock (12)
4.16 Certificate of Designation of Series F Convertible Preferred Stock (12)
4.17 Form of Warrant, dated September 22, 1998, issued in connection with
extending certain subordinated notes (aggregate of 1,666,666 shares of
which 333,334 remained unexercised at December 31, 2000) (13)
4.18 Form of Subscription Agreement for Series D Convertible Preferred Stock (9)
4.19 Form of Registration Rights Agreement for Series D Convertible Preferred
Stock (9)
4.21 By-Laws of Registrant, as amended - see Exhibit 3.2 above.
4.20 Restated Certificate of Incorporation of Registrant - see Exhibit 3.1 above
4.21 By-Laws of Registrant, as amended - see Exhibit 3.2 above
4.22 Form of Subscription Agreement, dated December 16, 1999, by and among
Registrant and certain noteholders (5)
4.23 Warrant, dated June 8, 1999, issued to W. David Sykes (12)
4.24 Form of warrant, dated June 8, 1999, issued to purchasers of Series E
Convertible Preferred Stock (12)
4.25 Registration Rights Agreement, dated June 8, 1999, between Registrant and
W. David Sykes (12)
4.26 Form of Registration Rights Agreement, dated June 8, 1999, issued to the
purchasers of Series E Convertible Preferred Stock (12)
4.27 Form of Employee Agreement between Registrant and W. David Sykes (12)
4.28 Letter Agreement, dated June 8, 1999, between H. Irwin Levy and W. David
Sykes (12)
10.1 Form of 8% Convertible Subordinated Promissory Note, between Registrant and
certain private investors (1)
10.2 Promissory Note for $1,050,000, dated November 15, 2000, between Registrant
and MLL Corp. (replaced note at exhibit 10.10)(1)
10.3 Promissory Note for $500,000, dated November 20, 2000, between Registrant
and Patrice Auld (1)
10.4 Promissory Note for $650,000, dated December 29, 2000, between Registrant
and H. Irwin Levy (replaced note at exhibit 10.9) (1)
10.5 Promissory Note for $600,000, dated January 16, 2001, between Registrant
and H. Irwin Levy (1)
69
10.6 Promissory Note for $125,000, dated January 17, 2001, between Registrant
and Larry Hemmerich (1)
10.7 Letter Agreement, dated October 18, 2000, between Registrant and Larry
Hemmerich, regarding revisions to Mr. Hemmerich's Employment Agreement (1)
10.8 Assumption and Amendment Agreement, dated September 14, 2000, between
Registrant and Wells Fargo Credit, Inc. (2)
10.9 Third Amended and Restated Line of Credit Note between Registrant and Wells
Fargo Credit, Inc., dated September 14, 2000 (2)
10.10 Continuing Guaranty between Registrant and Wells Fargo Credit, Inc. (2)
10.11 Promissory Note, dated July 31, 2000, between Registrant and H. Irwin Levy
in the amount of $2,500,000 (2)
10.12 Promissory Note, dated October 11, 2000, between Registrant and H. Irwin
Levy in the amount of $2,550,000 (replaced note at exhibit 10.8) (2)
10.13 Promissory Note, dated October 11, 2000, between Registrant and MLL Corp.
in the amount of $750,000(2)
10.14 Revised Employment Agreement between Registrant and Larry Hemmerich,
President and Chief Executive Officer of Registrant (2)
10.15 Escrow Agreement among Registrant, Wishmasters and Epstein, Becker &
Green, P.C., dated May 4, 2000 (3)
10.16 9.5% Subordinated Note, dated June 8, 1999, issued to the Sykes Children's
Trust of 1993 (12)
10.17 9.5% Subordinated Note, dated June 8, 1999, issued to the Sykes Family
Trust (12)
10.18 Form of Employment Agreement between Registrant and Johan Olstenius,
Stuart Campbell and Fahim Ahmed in connection with the acquisition of the
assets of OneofUs Company Limited (4)
10.19 Employment Agreement between Registrant and Larry Hemmerich (4)
10.20 Promissory Note for $500,000, dated March 15, 1999, between Registrant and
Maurice Halperin (13)
10.21 Promissory Note for $1 million, dated March 1, 1999, between Registrant
and H. Irwin Levy (13)
10.22 Form of Promissory Note, dated January 26, 1999, between Registrant and
(i) Herbert Gimelstob ($600,000), (ii) Maurice Halperin ($600,000), (iii)
Patrice Auld ($300,000) and (iv) James P. Marden ($300,000) (13)
10.23 1996 Stock Option Plan, dated October 5, 1996 (14)
10.24 Software License Agreement, dated January 10, 2000, by and among nStor
Corporation, Inc. and QLogic Acquisition Corporation (6)
10.25 Amendment to Registrant's 1996 Stock Option Plan (8)
10.26 Modification dated November 1, 1999, of Demand Note, dated July 15, 1999,
between Registrant and H. Irwin Levy (10)
70
10.27 Form of Amended and Restated Promissory Note, dated January 29, 1999,
between Registrant and (i) Herbert Gimelstob ($600,000), (ii) Maurice
Halperin ($600,000),(iii) Patrice Auld ($300,000) and (iv) James P. Marden
($300,000) (10)
10.28 Modification, dated December 1, 1999, of Demand Note dated July 15, 1999
between Registrant and H. Irwin Levy (8)
10.29 Modification, dated December 16, 1999, of Demand Note dated July 15, 1999
between Registrant and H. Irwin Levy (8)
21 Subsidiaries of Registrant
- --------------
1) Filed herewith.
2) Incorporated by reference to Exhibits previously filed as Exhibits to
Registrant's Form 10-Q for the quarter ended September 30, 2000, filed
November 14, 2000.
3) Incorporated by reference to Exhibits previously filed as Exhibits to
Registrant's Form S-3 Registration Statement, filed June 7, 2000.
4) Incorporated by reference to Exhibits previously filed as Exhibits to
Registrant's Form 10-Q for the quarter ended March 31, 2000, filed May 15,
2000.
5) Incorporated by reference to Exhibits previously filed as Exhibits to
Registrant's Form S-3 Registration Statement, filed January 9, 2000.
6) Incorporated by reference to Exhibits previously filed as Exhibits to
Registrant's Form 8-K dated and filed January 14, 2000.
7) Incorporated by reference to Exhibits previously filed as Exhibits to
Registrant's Form S-8 Registration Statement, dated January 6, 2000, filed
January 10, 2000.
8) Incorporated by reference to Exhibits previously filed as Exhibits to
Registrant's Form 10-K for year ended December 31, 1999, filed April 14,
2000.
9) Incorporated by reference to Exhibits previously filed as Exhibits to
Registrant's Form 10-Q for the quarter ended September 30, 1998, filed
November 16, 1998.
10) Incorporated by reference to Exhibits previously filed as Exhibits to
Registrant's Form 10-Q for the quarter ended September 30, 1999, filed
November 15, 1999.
11) Incorporated by reference to Exhibits previously filed as Exhibits to
Registrant's Form 8-K dated and filed November 5, 1999.
12) Incorporated by reference to Exhibits previously filed as Exhibits to
Registrant's Form 8-K dated June 8, 1999, filed June 23, 1999.
13) Incorporated by reference to Exhibits previously filed as Exhibits to
Registrant's Form 10-K for the year ended December 31, 1998, filed April
15, 1999.
14) Incorporated by reference to Exhibits previously filed as Exhibits to
Registrant's Form 10-K for the year ended October 31, 1996, filed January
28, 1997.
71
SIGNATURES
Pursuant to the requirements of Section 13 and 15(d) 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.
nSTOR TECHNOLOGIES, INC.
/s/ Larry Hemmerich
April 13, 2001 By:________________________________
Larry Hemmerich, Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
/s/ H. Irwin Levy
April 16, 2001 ___________________________________________
H. Irwin Levy, Chairman of the Board
/s/ Michael L. Wise
April 16, 2001 ___________________________________________
Michael L. Wise, Director
/s/ Bernard Green
April 13, 2001 ___________________________________________
Bernard Green, Director
/s/ Roger H. Felberbaum
April 16, 2001 ___________________________________________
Roger H. Felberbaum, Director
/s/ Larry Hemmerich
April 13, 2001 ___________________________________________
Larry Hemmerich, Chief Executive Officer
and Director
/s/ Jack Jaiven
April 13, 2001 ___________________________________________
Jack Jaiven, Principal Financial
Officer and Principal Accounting Officer