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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, 2001
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 _____
2
AGGREGATE MARKET VALUE OF THE VOTING COMMON STOCK
HELD BY NONAFFILIATES OF THE REGISTRANT
Common Stock, par value $.05 per share (Common Stock), was the only class of
voting common equity of the Registrant outstanding on December 31, 2001. Based
on the last sales price of the Common Stock on the American Stock Exchange
(AMEX) on March 5, 2002 ($.20), the aggregate market value of the approximately
36,778,000 shares of the voting Common Stock held by non-affiliates was
approximately $7.4 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 X 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:
114,603,144 shares of Common Stock, par value $.05 per
share, were outstanding as of March 5, 2002.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Definitive Proxy Statement of nStor Technologies, Inc.
for the 2002 Special 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. designs, develops and manufactures direct attached and
SAN (Storage Area Network) ready data storage enclosures and Storage Management
Software used in storage solutions for computing operations. 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 2000, Macintosh, SGI IRIX, Sun Solaris, and Linux, and utilizes
technology architectures such as Fibre Channel, Ultra SCSI (Small Computer
Systems Interface), Ultra2 LVD (Low Voltage Differential) SCSI, Ultra160 SCSI
(160MB/sec) and Ultra 320SCSI (320MB/sec). Our RAID (Redundant Array of
Independent Disks) 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 direct sales personnel in the United States and
indirectly through a global network of resellers and Original Equipment
Manufacturer (OEM) partners.
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 Internet at http:// www.nStor.com.
RECENT EVENTS
Effective March 1, 2002, we entered into a Reseller Agreement with a
wholly-owned subsidiary of Pacific Electric Wire & Cable Company, Ltd (Pacific).
The Agreement grants Pacific the right to market and sell our products for a
period of two (2) years in Mainland China and Taiwan on an exclusive basis, and
in the United States and Europe on a non-exclusive basis. The exclusivity right
is conditioned upon minimum purchases by Pacific of $5 million through February
28, 2003 and $10 million during the subsequent year, and upon the parties
agreeing, by the end of May 2002, on specific purchase prices to be paid by
Pacific.
In connection with our efforts to develop further strategic business
relationships with Pacific, effective March 1, 2002, we granted Pacific an
option to purchase up to thirty (30) million newly issued shares of our common
stock for a purchase price of $.40 per share, expiring on November 30, 2002.
INDUSTRY
The demand for increased information and data storage capacity has grown
dramatically as new storage applications create greater efficiencies. A
significant growth in Internet users and Internet business transactions has
resulted in the creation of millions of new web sites. Environments that have
traditionally been paper-intensive such as insurance, healthcare, education, law
firms, 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.
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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 SAN's and Network Attached Storage (NAS)
environments, the two fastest growing sectors in the data storage marketplace.
To successfully compete in this aggressive market, companies need innovative
products, strong integration expertise, and excellent support services.
PRODUCT STRATEGY
We believe our NexStor 3000 2U (3.5 inches) product line leads the industry in
terms of rack space density. The product line is offered for Fibre Channel,
SCSI, and Fibre-to-SCSI environments. Our storage enclosures feature fully
redundant, hot-swappable components and support the industry's fastest and most
dense disk drives. NexStor's advanced design and capability are targeted to the
mid-range to enterprise computing environment. The NexStor products designed by
us include SAF-TE (SCSI Access Fault-Tolerant Enclosure Services) and
SES-compliant (SCSI Enclosure Services) modules that can store up to 1.44
Terabytes (TB) 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 1.76TB in that same amount of space.
Our current hardware products include SAN-ready Fibre RAID and RAID-ready Fibre
JBODs (Just a Bunch of Disks). 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 offering for the SCSI marketplace.
Historically, our SCSI product offerings were the mainstay for the majority of
nStor's customer base. During 2001, we announced further development of our SCSI
product line in the form of 8- and 12-bay SCSI RAID enclosures as well as a
12-bay JBOD module to round out our NexStor Ultra160 SCSI product line.
Our AdminiStor software complements our NexStor product line as 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
and/or pager alerts to individuals or groups) for both Windows and Unix
environments, allowing users to manage data from remote locations.
At the November 2001 Comdex Show, we displayed our next generation of enclosure
architecture that is designed to provide Ultra320 SCSI and 2Gbit (2GB/sec) Fibre
Channel connectivity, doubling current performance architecture. The new design,
the 4000 Series, leverages our 3.5-inch (2U) design and will be one of the first
fully compatible Ultra320 designs available to the market. This new SCSI
enclosure design permits the integration of two SCSI RAID controllers within the
same 3.5-inch form factor, eliminating the dependency of an additional RAID
controller subsystem resulting in a more cost-effective design targeted at the
cost-sensitive, entry-level SCSI marketplace.
The 2Gbit Fibre Channel 4000 Series products provide high-availability storage
with flexibility and scalability to meet a customer's growing storage
requirements. This new Fibre Channel product line will allow nStor to enhance
the current integrated controller design while increasing more of the SAN
capabilities of the RAID controller. Fibre Channel has been the choice for
mid-range to enterprise-level storage, and we expect that it will continue to
grow as cost savings are realized by sharing the same managed storage pool for
multiple servers. This product is targeted to become the storage foundation for
newly deployed SANs.
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The new 4000 Series designs (SCSI and Fibre Channel) will be introduced in
12-bay versions, backward compatible to the prior 3000 Series, and will also be
managed by AdminiStor software. We feel that since neither Ultra320 nor 2Gbit
Fibre Channel has been completely accepted as a replacement for current product
technologies, our new product offerings should provide an opportunity to gain a
greater foothold in the OEM and System Integrator marketplace.
CURRENT PRODUCT OFFERINGS
NexStor 3150F / 3250F and 802F / 1202F - Fibre Channel JBOD (RAID-ready) and
RAID Systems
Our Fibre Channel products include the SAN-ready 3150F and 3250F complimented by
the RAID-ready 802F and 1202F. The NexStor 3150F 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
22 TB of storage within 56 inches of space. The 802F/3150F capacity solution
takes advantage of the largest capacity disk drives on the market by supporting
both 1 and 1.6-inch drives. The NexStor 802F JBOD product allows a customer to
grow to extreme capacity points and upgrade to the high-availability 3150F
within the same enclosure by simply integrating a pair of RAID controllers. This
investment protection permits IT managers to grow in 3.5-inch modular shelves
and convert to RAID capability as the computing environment dictates. The
NexStor 3150F and 802F product series is targeted at sectors such as data
warehousing and seismic analysis.
The NexStor 3250F is a 12-bay module, accommodating up to twelve 1-inch drives
and offering higher performance through increased spindle count. It scales up to
876 GB in 3.5-inch increments and provides 33% more disk drives in the same
space as the 8-bay series. The NexStor 3250F can connect up to seven additional
1202F JBOD modules behind a single set of RAID controllers, reaching a maximum
capacity of 7 TB of storage within 28 inches of space. The NexStor 3250F and
1202F are designed for intense I/O applications that prioritize performance over
capacity such as Online Transaction Processing (OLTP), database (Oracle, SQL,
Microsoft Exchange Server) and video editing.
NexStor 3150S/3250S and 802S/1202S - SCSI JBOD (RAID-ready) and RAID Systems
The NexStor 802S was our first Ultra160 JBOD product in our 3.5-inch form factor
and served as the foundation for the later release of RAID and 12-bay Ultra160
SCSI designs. nStor announced the release of the 12-bay and RAID Ultra160
versions during the second quarter of 2001 to complement the existing 8-bay
JBOD. The 8-bay SCSI series featured the 3150S and 802S that accommodate up to
eight 1.6 or 1-inch disk drives and offer up to 1.44TB of data storage. The
8-bay SCSI storage system is targeted for larger capacity storage environments
such as pre-and post-production editing and research and development facilities.
The introduction of the 12-bay RAID and JBOD SCSI series accommodates up to
twelve 1-inch disk drives and offers up to 876GB of data storage. The 12-bay
SCSI storage system is targeted for I/O intensive environments such as growing
databases and the storage for a Microsoft Exchange Server.
With a large part of the storage market still using SCSI, the NexStor 802S/3150S
and 1202S/3250S 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. Like nStor's Fibre Channel
product, the NexStor SCSI series offers an easy JBOD to RAID upgrade path to
protect the investment of an entry-level JBOD purchase.
2002 Planned Product Offerings
For 2002 we are planning a redesign of our chassis to improve its price points
and feature sets. The new line of products, the 4000 series, provides modular
electronics and mechanical designs that will allow us to take advantage of new
host and disk drive interface technologies more efficiently than our current
design, while reducing overall manufacturing costs.
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nStor 4000F and 4100F/4150F - Fibre Channel JBOD (RAID-ready) and RAID Systems
The next generation nStor Fibre Channel product line will have complete 2Gbit
host to drive connectivity. The 4000F series is positioned to be a direct
replacement of nStor's current 3000F series and will provide twice the possible
bandwidth. Since drive manufacturers are focused on only releasing 1-inch
low-profile disk drives, the 4000F will be a 12-bay enclosure system that can be
a standalone JBOD (4000F), a single RAID controller system (4100F) or a dual
RAID controller system (4150F). The 4000F JBOD system protects a customer's
storage investment as RAID controllers can be simply integrated into the back of
the system for instant RAID protection in the same 3.5-inch form factor. With
twelve 144GB disk drives, the 4000F series will be able to scale up to 18TB in
1.76TB, 3.5-inch modular increments. This modular design allows customers the
`pay as you grow' ability in a space-saving, high-performance, high-availability
storage system.
The 4000F JBOD and RAID series is currently in development and is planned for
initial shipments in the second quarter of 2002, with full production volumes
expected during the third quarter of 2002.
nStor 4000S and 4100S/4150S - SCSI JBOD (RAID-ready) and RAID Systems
To complement our Fibre Channel offering and broaden our product line to
approach more market opportunities, nStor's SCSI product line is also being
re-designed to add the latest Ultra320 technology and provide a more
cost-effective storage system for the price sensitive SCSI marketplace. The
initial introduction of the 4000 Series products will be a SCSI version with
Ultra320 JBOD and Ultra160 RAID host connectivity.
The 4000S series will also incorporate a 12-bay enclosure technology and will
house the latest, high-performance 15,000RPM and highest capacity 144GB disk
drives, providing the fastest I/O transfers and the largest amount of storage
capacity within a 2U form factor. The 4000S JBOD will have an Ultra320 bus
architecture that will provide 320 MB/s single and 640 MB/s dual bus data paths.
The 4000S JBOD is easily upgraded to the 4100S single RAID controller or the
4150S dual RAID controller system by simply integrating RAID controllers into
the back of the storage system. The ability to integrate the SCSI RAID
controllers directly into the back of the storage system eliminates the cost
that the previous 1U nStor SCSI controller bridgehead required to convert a JBOD
into a high-availability RAID system.
The 4000S is designed to be a direct replacement of the current 3000S product
line and is planned for initial shipments by the end of the first quarter of
2002 with full production volumes by the end of the second quarter of 2002.
AdminiStor
nStor's AdminiStor Storage Management Software suite allows administrators to
configure, manage, and monitor all of nStor's product lines from anywhere in the
world. AdminiStor is comprised of two applications, AdminiStor RCU and
AdminiStor Plus. AdminiStor RCU (RAID Configuration Utility) is the basic
configuration utility that allows an administrator to configure and assign
storage from a server that is directly connected or on the same SAN as the
storage. AdminiStor Plus is the expansion of AdminiStor RCU and provides greater
flexibility for the IT manager. Through the use of AdminiStor Plus, storage
systems directly-connected or part of a SAN architecture can be managed from any
location utilizing a standard web-connection. The enhanced Plus version of the
software allows remote fault notification and multiple party fault notification.
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.
AdminiStor is JAVA-based and provides heterogeneous support for multiple
platforms with an easy to understand tree structure to outline the storage. The
GUI (Graphic User Interface) is displayed in user-friendly Netscape(R) Navigator
or Microsoft(R) Internet Explorer.
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Technical Service
We offer a range of full-time service and support programs through a third party
service company, providing customers with a variety of on-site and help-desk
support services (see Technical Support and Customer Service).
SAN Solutions
As an alternative to direct-connect, server-attached storage, networked storage
architectures have been gaining popularity. SANs provide the scalability,
accessibility, and manageability to satisfy present and future business
computing requirements.
We develop, test, and install high availability SAN storage solutions in both
clustered and heterogeneous server environments. In addition to our SAN-ready
Fibre Channel products, we also offer pre-tested and certified switches and
attach kits necessary for a complete SAN architecture.
As the need for storage 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 believe our 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 patent, 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, WEB STORAGE MANAGER, and "for the life of your
data". 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 direct sales personnel to end-users
in the United States and indirectly through a global network of OEM partners and
volume channels such as Systems Integrators and Value Added Resellers (VARs).
Direct and indirect product sales represented 43% and 35%, respectively of our
total sales in 2001, compared to 75% and 14%, respectively, in 2000, reflecting
the shift in our sales and marketing strategy to provide greater technical
marketing and sales support to our indirect sales function. One customer
(indirect) accounted for 12% of net sales in 2001. No customers accounted for
more than 10% in 2000. In 1999, two customers, Silicon Graphics (indirect) and
Intel (direct), accounted for 15% and 11%, respectively, of our 1999 sales.
8
Service contracts, principally with end-users, represented 22% and 11% during
2001 and 2000, respectively. During 2001, we sold substantially all of our
servicing business and we expect servicing revenues to be insignificant in 2002.
The increase in service revenue for 2001 is primarily the result of recognizing
the remaining unamortized service revenue following the sale of our servicing
business. Substantially, all of our servicing business is currently contracted
through a third party service company.
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 OEM channel sales provide 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.
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 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 a 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, regional, national and international tradeshow
participation, and public relations.
TECHNICAL SUPPORT AND CUSTOMER SERVICE
We provide technical support for pre-sales system design and manage 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 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 customer support.
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. 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 various levels of on-site service for our products, for which we contract
primarily with third-party service providers. In addition, we offer a Depot
Express program for certain of our products, which 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,
which provides expedited shipment for failed components on a per-incident basis,
based upon availability. This is a non-contracted service and requires a fee
only if a component fails and a replacement is shipped.
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MANUFACTURING AND SUPPLIERS
Our manufacturing operations are located in San Diego, California. Our products
are assembled from components and prefabricated parts, such as controllers,
cabinets, disk drives and power supplies, manufactured and supplied by others.
We work closely with a group of regional, national and international suppliers,
that are 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 designed specifically 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 our 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 component as
needed may cause a reduction in our sales volume.
We have no long-term supply contracts. There can be no assurances 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 materially 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 assurances 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.
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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. All
disk drive compatibility testing with nStor's product lines (SCSI and Fibre
Channel) is conducted in Lake Mary.
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. In conjunction with the interoperability lab, San Diego hosts the
AdminiStor software development and testing.
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 new 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 storage subsystems is subject to intense competition. We compete
not only with other enclosure and disk array manufacturers, but also with
manufacturers of proprietary, integrated computer systems and system integrators
who sell computer systems containing general purpose RAID subsystems, most 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 ours.
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 February 28, 2002, we employed 71 full-time employees, of which 27 were
involved in engineering, product development and technical support, 13 in sales
and marketing, 22 in manufacturing and operations, and 9 in finance, management
and administration. This number of employees represents a significant reduction
in our work force over the past year. 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.
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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, or deemed, to be exhaustive
or definitive of all the material risks involved in our company's business.
Recent Losses; Capital Needs
We have experienced negative cash flows from operations and have suffered
substantial net losses for the years ended December 31, 2001, 2000 and 1999 of
$14 million, $21.9 million and $18.7 million, respectively. At December 31,
2001, we had an accumulated deficit of $96.3 million. There can be no assurances
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.
Since January 1, 2001, and through February 28, 2002, we obtained $20.5 million
of equity and debt financing from private investors. Of these amounts, $12.1
million was received from Maurice Halperin, the Company's Chairman of the Board
since August 15, 2001 and a principal stockholder, or companies controlled by
Mr. Halperin (collectively, Mr. Halperin), consisting of $6 million in cash
received between August 2001 and November 2001, and $6.1 million in marketable
securities received in November 2001 (see Note 3 to Consolidated Financial
Statements). Through February 28, 2002, we have received $2.3 million in cash
from the sale of a portion of the marketable securities (see Note 6 to
Consolidated Financial Statements). Equity and debt financing obtained from
January 2001 through February 28, 2002, also included $2.8 million from H. Irwin
Levy, our Vice 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.
We are currently exploring 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. However, due to conditions in the technology-related financial
markets and other uncertainties, many of which are outside our control, there
can be no assurances that such required additional funds will be available on
terms acceptable to us, if at all, or that we will be able to generate positive
cash flows from operating activities in the future.
Inability to Comply with Financial Covenants
Since the fourth quarter of 2000, we have not been in compliance with the
minimum net worth and net income covenants under our bank line of credit. On
February 4, 2002, the bank advised us that the outstanding principal balance
exceeded the borrowing base by $1.1 million and demanded immediate payment of
the over-advance. The bank also indicated that our non-bank indebtedness of
approximately $4.7 million was incurred in violation of the loan agreement. In
addition, effective February 4, 2002, the bank applied certain amendments to the
loan agreement and also advised us that it does not intend to renew the credit
facility when it matures in April 2002. We are currently seeking a replacement
lender, but there is no assurance we will be successful in obtaining a new
credit line facility on terms acceptable to us, if at all. As of February 28,
2002, the outstanding balance of our bank line of credit was $1.3 million.
12
Fluctuations in Operating Results
We have experienced significant period-to-period fluctuations in our operating
results. These fluctuations are partially 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 materially adversely affected. Our revenues in any period 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 sales often occur in the closing weeks of each period. 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, due to our 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 and are encouraging our
customers to migrate to this new product line. 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 our
existing products as well as our 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 increasing technical
requirements 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 open systems data storage 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, Xyratex 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 share, 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.
In February 2002, W. David Sykes, our former Executive Vice President of
Marketing and Sales, filed a complaint against us in the Circuit Court of Palm
Beach County, Florida, in which Mr. Sykes claims he was wrongfully terminated
under provisions of his employment agreement with us. We believe that we acted
in accordance with the termination provisions of the agreement and that no
further compensation or benefits are due to Mr. Sykes. We believe that we have
good defenses to the claim and that we will not incur any material liability.
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
certain 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
Our open system data storage products may contain undetected software or
firmware errors or hardware 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 generally range in value from a few thousand dollars to hundreds
of thousands of 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 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 period could be reduced if large orders forecasted for a certain period
are delayed or are not realized. Factors that could delay or defer an order
include:
o time needed for technical evaluation 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 RAID controllers designed by one of our suppliers. Although we
can use other suppliers, the delay in integrating these parts into our systems
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 order cancellations.
Concentrated Customer Base
We operate predominantly in one business segment, open systems data storage
products, including external RAID subsystems. In 2001, one customer accounted
for 12% of our net sales and in 1999, two customers amounted to an aggregate of
26% of our net revenues. In 2000, no customers accounted for more than 10% of
our net revenues.
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.
Narrow Market
Substantially all of our revenues to date have been concentrated in the UNIX,
Windows NT and Windows 2000 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.
16
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 information storage industry.
The stock market has also experienced extreme price and volume fluctuations
which have affected the market price of many companies and which have at times
been unrelated to the operating performance of the specific companies whose
stock is traded. Broad market fluctuations, developments in the technology
industry, general economic conditions and political and current events may
adversely affect the market price of our common stock.
In addition, if our current security holders sell substantial amounts of our
common stock, including shares issued upon the exercise of outstanding options
and warrants, in the public market, the market price of our common stock could
fall.
Insufficient Funding
We have expended and may be required to expend substantial funds for 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
related 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
Our Auditor's Have Expressed Substantial Doubt as to Our Ability to
Continue as a "Going Concern"
The auditors' reports for our consolidated financial statements for the years
ended December 31, 2001 and 2000, state 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 although there is
substantial doubt, the financial statements have been prepared on a
going-concern basis 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.
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. The
Company has received correspondence from AMEX requesting certain information in
this regard and expects to be able to satisfy the AMEX requirements. However,
there is no assurance that our common stock will continue to satisfy the
requirements for listing on the AMEX. Delisting of our common 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 Mr. Sykes
and 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 expired in February 2002 and which
is currently on a month-to-month basis. We expect to relocate into significantly
reduced space. The annual base rent of our current space was approximately
$119,000.
We believe our existing facilities are adequate to meet future needs. See Note
16 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.
18
In February 2002, W. David Sykes, our former Executive Vice President of
Marketing and Sales, filed a complaint against us in the Circuit Court of Palm
Beach County, Florida, in which Mr. Sykes claims he was wrongfully terminated
under provisions of his employment agreement with us. We believe that we acted
in accordance with the termination provisions of the agreement and that no
further compensation or benefits are due to Mr. Sykes. We believe that we have
good defenses to the claim and that we will not incur any material liability.
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 2001.
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, 2001 and 2000
as reported by AMEX. During that period, we did not pay dividends on our common
stock and we do not expect to pay any dividends in the near future.
Market Price Range
--------------------
2001 High Low
---- -------- --------
First quarter $ 2.00 $ .60
Second quarter .90 .30
Third quarter .58 .35
Fourth quarter .49 .23
2000
----
First quarter $ 6.87 $ 2.37
Second quarter 5.25 2.50
Third quarter 3.44 1.75
Fourth quarter 2.69 .81
As of February 28, 2002, we had 114,603,144 shares of common stock outstanding
and approximately 1,768 holders of record of such stock.
Recent Sales of Unregistered Securities and Use of Proceeds
In January 2002, in connection with the Halco Investment, we issued the
following: (i) 750,000 shares of our common stock in satisfaction of a $300,000
note payable to H. Irwin Levy; (ii) 39 million shares of our common stock to
Halco for the conversion of our Series K Convertible Preferred stock; (iii) an
aggregate of 20,877,435 shares of our common stock upon the conversion of our
Series E, Series H and Series I Convertible Preferred Stock; (iv) 12,993,072
shares as an inducement for the holders of those series of preferred stock to
convert; and (v) 3,263,618 shares of our common stock in satisfaction of $1.5
million of accrued dividends(see Note 3 to Consolidated Financial Statements).
In February 2002, we issued 446,776 shares of our common stock in satisfaction
of approximately $138,000 in accrued dividends on our Series D Convertible
Preferred Stock, which was previously converted into common stock in October
2001.
All of the foregoing issuances were exempt from registration under Section 4(2)
of the Act.
20
Item 6. Selected Financial Data
(dollars in thousands, except per share data)
The following table summarizes certain selected consolidated financial data for
the five years ended December 31, 2001.
Certain amounts for years prior to 2001 have been reclassified to conform to the
2001 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:
Year Ended December 31,
----------------------------------------------------------------------------------------
2001 2000 1999(3) 1998 1997
------------ ------------ ------------ ------------ ------------
Sales ........................... $ 17,886 $ 40,197 $ 41,089 $ 18,026 $ 26,244
Gross margin .................... 2,049 9,872 9,763 2,768 4,783
Net loss ........................ (13,958)(1) (21,921)(2) (18,704)(4) (10,407) (7,886)
Net loss available to
common stock .................. (18,518)(5) (22,606) (19,938) (11,888) (7,886)
Basic and diluted net loss
per common share .............. (.41) (.69) (.89) (.63) (.42)
Weighted average number of common
shares considered outstanding,
basic and diluted ............. 44,832,503 32,789,832 22,505,084 18,888,911 18,670,477
At end of year:
Total assets..................... 11,968 15,722 34,041 14,128 16,762
Long-term debt .................. 3,600 7,258 6,329 7,043 1,504
Shareholders' equity (deficit) .. 487 (7,526) 6,273 3,150 5,037
- ------------
(1) Includes extraordinary gains of $.9 million ($.02 per basic and fully
diluted share).
(2) Includes charge of $12 million for impairment of unamortized goodwill
related to an acquisition completed in 1999 and gain of $5.6 million on the sale
of assets.
(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 $4.6 million for impairment of unamortized goodwill
related to an acquisition completed in 1996 and extraordinary loss of $.5
million ($.02 per basic and diluted share).
(5) Includes non-cash charge of $3 million for the induced conversion of
convertible preferred stock.
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 inherently involve risks and
uncertainties that could cause actual results to differ materially from the
forward-looking statements. Factors that would cause or contribute to such
differences include, but are not limited to, our inability to increase sales to
current customers and to expand our customer base, continued acceptance of our
products in the marketplace, our inability to improve the gross margin on our
products, competitive factors, dependence upon third-party vendors, and other
risks detailed in our periodic report filings with the Securities and Exchange
Commission.
21
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, our ability to increase sales to
current customers and to expand our customer base, level of gross margins and
operating expenses, lack of market acceptance or demand for our new products,
price competition, conditions in the technology industry and the economy in
general, as well as legal proceedings. The economic risk associated with
material cost fluctuations, inventory obsolescence and 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 report.
Overview
We are a designer, developer and manufacturer of direct attached and SAN
(Storage Area Network) ready data storage enclosures and Storage Management
Software for computing operations. Our product line supports a variety of
operating systems, including Windows NT and Windows 2000, Solaris, Linux, SGI
IRIX and Macintosh platforms. Designed for storage-intensive environments such
as the Internet or other mission-critical applications, our products are offered
in Fibre Channel, Fibre-to-SCSI and SCSI architectures.
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 computer 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 comparisons between 2000 and 1999 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, principally consisting of certain patented technology
referred to as Adaptive RAID, to a subsidiary of QLogic Corporation.
Going-Concern
With respect to our consolidated financial statements for the years ended
December 31, 2001 and 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 operating activities, the fact that we are not in compliance
with certain covenants and provisions of our existing bank facility and have
been advised that the bank does not intend to renew that facility, raise
substantial doubt about our ability to continue as a going concern. A
"going-concern" opinion indicates that although there is substantial doubt, the
financial statements have been prepared on a going-concern basis 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.
22
Results of Operations
The following table sets forth certain operating data as a percentage of sales.
Year Ended December 31,
-----------------------------
2001 2000 1999
---- ---- ----
Sales ...................................... 100% 100% 100%
Cost of sales .............................. 89 75 76
---- ---- ----
Gross margin ............................... 11 25 24
Selling, general and administrative ........ 58 40 37
Research and development ................... 20 9 7
Depreciation and amortization .............. 9 11 8
Impairment of goodwill ..................... -- 30 11
---- ---- ----
Loss from operations ....................... (76) (65) (39)
Gain on sale of Borg assets ................ -- 14 --
Interest expense and other items, net ...... (7) (3) (4)
---- ---- ----
Loss before extraordinary items ............ (83) (54) (43)
Extraordinary gains (losses) ............... 5 -- (1)
---- ---- ----
Net loss ................................... (78)% (54)% (44)%
==== ==== ====
Comparison of Years Ended December 31, 2001 and 2000
For the year ended December 31, 2001, we reported a net loss of $14 million as
compared to a net loss of $21.9 million for the year ended December 31, 2000.
Results of operations for 2001 include net extraordinary gains of $.9 million,
consisting of $1.3 million of gains from negotiated discounts on purchases from
vendors, less a $.4 million extraordinary loss on debt extinguishment. Results
for 2001 also include losses on marketable securities (principally unrealized)
of $.8 million. Results of operations for 2000 include a net gain of $5.6
million from the sale of Borg assets and a charge of $12 million for the
impairment of unamortized goodwill.
Sales
Sales for 2001 were $17.9 million as compared to $40.2 million in 2000, a
decrease of $22.3 million or 55%.
The significant decrease reflects the transition from our older technology
legacy products to our technology products centered around our NexStor 2U
storage enclosures and RAID systems as well as the economic downturn which has
caused customer delays in acquiring technology and other capital equipment.
During 2001, we began to expand our indirect channel business and shift our
sales and marketing strategy to provide greater technical marketing and sales
support to our indirect sales function. As part of that strategy, since January
2001, we have significantly reduced our direct sales personnel and related
costs, and are currently focusing our direct sales force to targeted markets as
well as existing customers.
23
During 2001, direct, indirect and service revenues represented 43%, 35% and 22%
of our sales revenues, compared to 75%, 14% and 11% in 2000. In August 2001, we
sold substantially all of our service business; accordingly, we expect our
service revenues for 2002 to be insignificant. The higher service revenues in
2001 relates to the recognition as revenue of the remaining unamortized deferred
revenues following the sale of the service business.
Cost of Sales / Gross Margins
Gross margins decreased from 25% in 2000 to 11% in 2001. Gross margins in both
periods were adversely affected by the level of fixed costs inherent in our
operations as compared with significantly lower than expected sales levels as
well as increases in inventory reserves due to obsolete inventory of $2.5
million and $1.6 million in 2001 and 2000, respectively. Our gross margins are
dependent, in part, on product mix, which fluctuates from time to time. Our
material costs are subject to fluctuations experienced during business cycles
that create shortages and excess supplies of some critical components, thereby
creating increases and decreases in prices.
Selling, General and Administrative Expenses (SG&A)
SG&A decreased to $10.4 million in 2001 from $16.2 million in 2000. The $5.8
million decrease is primarily the result of our overall work force reduction
discussed under "Sales". We expect these costs to continue to decrease during
2002 as a direct result of recent further reductions in our overall workforce.
Research and Development
Research and development expenses amounted to $3.6 million in 2001, as compared
to $3.5 million in 2000. Amounts in both years reflect the costs incurred to
develop our NexStor 3000 and 4000 2U product lines. We believe that considerable
future investments in research and development will be required to remain
competitive.
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 incurred substantially in advance of related revenues, or in certain
situations, may not result in generating revenues.
Depreciation and Amortization / Impairment of Goodwill
Depreciation and amortization decreased to $1.6 million in 2001 from $4.5
million in 2000. The decrease was due to reduced amortization resulting from the
fourth quarter 2000 write-down of $12 million of goodwill which was determined
to have been impaired because of our projected inability to generate sufficient
future operating income from the assets acquired in the Andataco acquisition.
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142 (SFAS 142), Goodwill and Intangible
Assets, which revises the accounting for purchased goodwill and intangible
assets. Under SFAS 142, goodwill and intangible assets with indefinite lives
will no longer be amortized and will be tested for impairment annually. SFAS 142
is effective for fiscal years beginning after December 15, 2001, with earlier
adoption permitted. The Company expects its implementation of SFAS 142 in 2002
will result in the discontinuation of amortization of unamortized goodwill with
a carrying amount of approximately $2 million as of December 31, 2001.
Amortization for the year ended December 31, 2001 amounted to $.4 million.
24
Other Income, Net
Other income, net amounted to $.4 million in 2001, primarily consisting of the
reversal of previously recorded liabilities which were determined in 2001 to no
longer be due, partially offset by a write-off of certain assets related to our
Taiwan facility. In 2000, other income was not significant.
Interest Expense
Interest expense decreased $.4 million to $.9 million in 2001. The decrease is
primarily attributable to decreased lower average borrowings and lower interest
rates.
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.
Net Loss Available to Common Stock
Preferred Stock Dividends
During 2001 and 2000, with the exception of our Series K Preferred Stock, all
classes of our convertible preferred stock required dividends at 8%-10% per
annum. Preferred stock dividends increased by $.9 million to $1.6 million during
2001 principally due to the issuance of $2 million and $11.9 million of
preferred stock in December 2000 and April 2001, respectively, partially offset
by the automatic conversion of $3 million and $2 million of preferred stock to
common stock in July 2000 and October 2001, respectively. In connection with the
Halco Investment, which closed in November 2001, all of our remaining
convertible preferred stock and accrued dividends thereon were converted to
common stock.
Induced Conversion of Convertible Preferred Stock
In November 2001, as a result of inducement shares issued in connection with the
conversion of our convertible preferred stock as a condition to the Halco
investment (see Note 3 to Consolidated Financial Statements), we recorded a $3
million non-cash charge to arrive at net loss available to common stock,
representing the fair value of the inducement shares issued. The fair value was
based on $.23 per share, the price paid by Halco for its purchase of 39 million
shares of our common stock.
Comparison of Years Ended December 31, 2000 and 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 the Borg assets and a charge of $12 million for the impairment of unamortized
goodwill. Results of operations for 1999 include an extraordinary loss of $.5
million on extinguishment of debt and a charge of $4.6 million from the
impairment of unamortized goodwill.
Sales
Sales for 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 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 NexStor 3000 Series 2U
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.
25
Cost of Sales / Gross Margins
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 (SG&A)
SG&A increased to $16.2 million in 2000 from $15.3 million 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.
Research and Development
Research and development expenses amounted to $3.5 million in 2000, as compared
to $3 million 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 NexStor 3000 Series 2U enclosures as well as the
inclusion of a full year of expenses related to the Andataco acquisition.
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 incurred substantially 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 in 2000 from $3.4
million in 1999. This increase was 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 projected inability to generate sufficient future operating income from the
assets acquired in the Parity acquisition.
During the fourth quarter of 2000, we recorded a goodwill write-down of
approximately $12 million. This write-down eliminated all unamortized goodwill
related to the 1999 Andataco acquisition. The Andataco goodwill was determined
to have been impaired because of our projected 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 expense on
the $5.1 million note issued in connection with the Andataco acquisition as
compared to seven months of interest expense in 1999.
26
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.
Net Loss Available to Common Stock
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.
Embedded Dividend Attributable to Benefical Conversion Priviledge
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.
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 experienced negative
cash flows from operating activities and have suffered substantial recurring net
losses of $14 million, $21.9 million and $18.7 million for the years ended
December 31, 2001, 2000 and 1999, respectively. In addition, we are not in
compliance with certain covenants and provisions under our revolving credit
facility which expires on April 30, 2002 and have been advised that the bank
does not intend to renew the credit facility. These matters, among others, raise
substantial doubt about our ability to continue as a going-concern.
During most of 2000, our management team formulated and implemented our current
product strategy centered around our NexStor 3000 Series 2U line of 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 2001, the decline in revenues of
our older products exceeded the increase in sales of our newer technology
solutions. This decline in revenues combined with the recent decline in economic
and market conditions has significantly contributed to our operating losses.
During 2001, we shifted our sales and marketing strategy to provide greater
technical, marketing and sales support to expand our indirect customer channel.
As part of this strategy, since January 2001, we have significantly reduced our
direct sales personnel and related costs, and are currently focusing our direct
sales team to targeted markets and existing customers.
Since January 1, 2001, and through February 28, 2002, we obtained $20.5 million
of equity and debt financing from private investors. Of these amounts, $12.1
million was received from Maurice Halperin, the Company's Chairman of the Board
since August 15, 2001, and a principal stockholder or companies controlled by
Mr. Halperin (collectively, Mr. Halperin), consisting of $6 million in cash
received between August 2001 and November 2001, and $6.1 million in marketable
securities received in November 2001 (see Note 3 to Consolidated Financial
Statements). From November 2001 through March 2002, we received $4 million in
cash from the sale of all of the marketable securities (see Note 6 to
Consolidated Financial Statements). Equity and debt financing obtained from
January 2001 through February 28, 2002 also included $2.8 million from H. Irwin
Levy, our Vice 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.
27
As of December 31, 2001, our revolving credit facility (Bank Line of Credit)
provided for borrowings based on the lesser of $10 million or: (i) 85% of
eligible accounts receivable, as defined, plus (ii) the lesser of $1.25 million
or 20% of eligible inventory, as defined (collectively, the Borrowing Base). The
Bank Line of Credit which matures in April 2002, provides for interest at prime
plus 2 1/2%, requires a facility fee of .25% based on the average unused portion
of the maximum borrowings, is collateralized by substantially all of our assets,
and provides for certain financial covenants, including minimum net worth and
net income requirements. Since the fourth quarter of 2000, we have not been in
compliance with the minimum net worth and net income covenants under our Bank
Line Of Credit. On February 4, 2002, the bank advised us that the outstanding
principal balance exceeded the Borrowing Base by $1.1 million and that they were
demanding immediate payment of the over-advance. The bank also indicated that
our non-bank indebtedness of approximately $4.7 million was incurred in
violation of the loan agreement. In addition, effective February 4, 2002, the
bank applied the following amendments to the Bank Line of Credit: (1) an
increase in the interest rate to prime plus 3.5%, (2) a decrease in the overall
facility to $3.5 million; and (3) a reduction in the inventory borrowing limit
to $900,000 with further reductions of 2% of eligible inventory per week,
effective February 12, 2002. The bank has also advised that it does not intend
to renew the Bank Line of Credit. We have begun to seek a replacement lender but
there is no assurance that we will be successful in obtaining a new credit
facility on terms acceptable to us, if at all. As of February 28, 2002, the
outstanding balance of the Bank Line of Credit was $1.3 million.
We are currently exploring 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. However, due to conditions in the technology-related financial
markets and other uncertainties, many of which are beyond our control, there can
be no assurances that such required additional funds will be available on terms
acceptable to us, if at all, or that we will be able to generate positive cash
flows from operating activities in the future. We currently have insufficient
liquidity to fund our operating needs for the next twelve months.
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 in operating activities amounted to $10.3 million and $9.4 million
for 2001 and 2000, respectively. The most significant use of cash for both years
was our loss from operations (before depreciation, amortization and other
non-cash items) of $8.1 million in 2001 and $6.1 million in 2000. During 2001
and 2000, we used cash of $5.2 million and $2.8 million, respectively, in the
reduction of deferred revenue, accounts payable and other liabilities. In
addition, in 2000, we used $2.9 million to increase inventories. The most
significant source of cash was the reduction of accounts receivable of $1.2
million in 2001 and $2.1 million in 2000.
Investing Activities
Net cash used in investing activities amounted to $.2 million in 2001. Net cash
provided by investing activities amounted to $5.9 million in 2000. Cash used for
purchases of property and equipment was $.2 million and $.9 million during 2001
and 2000, respectively. Cash provided in 2000 of $7 million was from the Borg
sale.
28
Financing Activities
Net cash provided by financing activities for 2001 amounted to $11.3 million,
principally consisting of borrowings from private investors of $11.2 million
(including $3.3 million from Mr. Levy and $5 million from Halco) of which $6.9
million was satisfied by issuing convertible preferred stock and $.3 million was
satisfied by issuing common stock. An additional $1.2 million of cash was
provided in 2001 by issuing convertible preferred stock to private investors
(including $1 million from Halco). Net cash provided by financing activities for
2000 amounted to $2.9 million, principally consisting of $2.6 million in net
borrowings from private investors (including $2.1 million from Mr. Levy), $1.2
million from the exercise of stock options and warrants, and $1 million from our
equity draw down facility. During 2001 and 2000, we paid $.1 million and $.8
million, respectively, in preferred stock dividends and had net repayments on
our Bank Line of Credit of $1.1 million and $1 million, respectively.
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 2002.
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.
29
Item 8. Financial Statements and Supplementary Data
Table of Contents to Consolidated Financial Statements
Page
Report of Independent Certified Public Accountants ..................... 30
Report of Independent Certified Public Accountants ..................... 31
Consolidated Financial Statements:
Balance Sheets - December 31, 2001 and 2000 ........................... 32
Statements of Operations - Years Ended
December 31, 2001, 2000 and 1999 ................................... 33
Statements of Shareholders' Equity (Deficit)
Years Ended December 31, 2001, 2000 and 1999 ....................... 34-35
Statements of Cash Flows - Years Ended
December 31, 2001, 2000 and 1999 ................................... 36-37
Notes to Consolidated Financial Statements ............................ 38-60
Report of Independent Certified Public Accountants ..................... 61
Report of Independent Certified Public Accountants ..................... 62
FINANCIAL STATEMENT SCHEDULES. The following financial statement schedules of
nStor Technologies, Inc. for the years ended December 31, 2001, 2000 and 1999
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 ............. 63-65
Schedule II - Valuation and Qualifying Accounts ........................ 66
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.
30
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors of
nStor Technologies, Inc.
We have audited the accompanying consolidated balance sheet of nStor
Technologies, Inc. and subsidiaries (the "Company") as of December 31, 2001, and
the related consolidated statements of operations, shareholders' equity and cash
flows for the year ended December 31, 2001. 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 audit.
We conducted our audit 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 audit provides 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, 2001, and the results of their
operations and their cash flows for the year ended December 31, 2001 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 significant recurring losses,
minimal working capital, serious liquidity concerns, minimal shareholders'
equity, 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.
The consolidated financial statements of nStor Technologies, Inc. and
subsidiaries as of December 31, 2000 and 1999 were audited by other auditors
whose report dated February 9, 2001, except as to Paragraph four of Note 6 and
Note 15, which are as of March 27, 2001, and included in this Form 10-K, on
those statements included an explanatory paragraph describing conditions that
raise substantial doubt about the Company's ability to continue as a going
concern.
/S/ Swenson Advisors, LLP
Swenson Advisors, LLP
San Diego, California
April 4, 2002
31
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors of
nStor Technologies, Inc.
We have audited the accompanying consolidated balance sheet of nStor
Technologies, Inc. and subsidiaries (the "Company") as of December 31, 2000, and
the related consolidated statements of operations, shareholders' (deficit)
equity and cash flows for the each of the two 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 audits 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 the results of their
operations and their cash flows for each of the two 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 losses 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
32
nSTOR TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
=========================================
(dollars in thousands)
December 31,
-----------------
ASSETS 2001 2000
------ ------- -------
Current assets:
Cash and cash equivalents ............................ $ 857 $ 37
Marketable securities ................................ 4,255 --
Accounts receivable, net ............................. 1,925 4,395
Inventories .......................................... 1,364 5,174
Prepaid expenses and other ........................... 207 1,278
------- -------
Total current assets ........................... 8,608 10,884
Property and equipment, net of $5,641 and
$4,583 in accumulated depreciation ................... 1,367 2,384
Goodwill and other intangible assets, net of
$808 and $400 in accumulated amortization ............ 1,989 2,397
Other non-current assets ............................... 4 57
------- -------
$11,968 $15,722
======= =======
LIABILITIES
-----------
Current liabilities:
Bank line of credit .................................. $ 2,991 $ 4,086
Other borrowings ..................................... 1,100 --
Accounts payable and other ........................... 3,790 9,504
Deferred revenue ..................................... -- 2,400
------- -------
Total current liabilities ...................... 7,881 15,990
Long-term debt ......................................... 3,600 7,258
------- -------
Total liabilities .............................. 11,481 23,248
------- -------
Commitments, contingencies and subsequent events
SHAREHOLDERS' EQUITY (DEFICIT) (Note 3)
------------------------------
Preferred stock, $.01 par; 1,000,000 shares
authorized, in order of preference:
Convertible (except for Series G)
preferred stock assumed issued and
outstanding as of December 31, 2001 and 2000,
respectively:
Series F, 0 and 722, aggregate liquidation
value $0 and $722; Series D, 0 and 2,000,
aggregate liquidation value $0 and $2,000;
Series E, 0 and 3,500, aggregate liquidation
value $0 and $3,500; Series G, 0 and 2,000,
aggregate liquidation value $0 and $2,000 ............ -- --
Common stock, $.05 par; 200,000,000 shares
authorized; 114,603,144 and 35,478,489
shares assumed issued and outstanding at
December 31, 2001 and 2000, respectively ............. 5,729 1,773
Additional paid-in capital ............................. 94,104 71,529
Deficit ................................................ (99,346) (80,828)
------- -------
Total shareholders' equity (deficit).................... 487 (7,526)
------- -------
$11,968 $15,722
======= =======
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,
---------------------------------
2001 2000 1999
-------- -------- --------
Sales ...................................... $ 17,886 $ 40,197 $ 41,089
Cost of sales .............................. 15,837 30,325 31,326
-------- -------- --------
Gross margin ......................... 2,049 9,872 9,763
-------- -------- --------
Operating expenses:
Selling, general and administrative ...... 10,354 16,232 15,340
Research and development ................. 3,579 3,504 2,981
Depreciation and amortization ............ 1,622 4,468 3,355
Impairment of goodwill ................... -- 11,959 4,588
-------- -------- --------
Total operating expenses ................... 15,555 36,163 26,264
-------- -------- --------
Loss from operations ....................... (13,506) (26,291) (16,501)
Gain on sale of assets of Borg Adaptive
Technologies ............................. -- 5,575 --
Realized and unrealized losses on
marketable securities, net ............... (811) -- --
Other income, net .......................... 402 84 313
Interest expense ........................... (912) (1,289) (2,051)
-------- -------- --------
Loss before preferred stock dividends,
extraordinary items and inducement
conversion ............................... (14,827) (21,921) (18,239)
Extraordinary gains (losses) from debt
extinguishment (net of tax of $0) ........ 869 -- (465)
-------- -------- --------
Net loss ................................... (13,958) (21,921) (18,704)
Preferred stock dividends .................. (1,560) (685) (902)
Induced conversion of convertible
preferred stock .......................... (3,000) -- --
Embedded dividend attributable to
beneficial conversion privilege
of convertible preferred stock ........... -- -- (332)
-------- -------- --------
Net loss available to common stock ......... ($18,518) ($22,606) ($19,938)
======== ======== ========
Basic and diluted net loss per common share:
Loss before extraordinary items .......... ($ .43) ($ .69) ($ .87)
Extraordinary gains (losses) ............. .02 -- (.02)
-------- -------- --------
Net loss per common share ................ ($ .41) ($ .69) ($ .89)
======== ======== ========
Weighted average number of common
shares considered outstanding,
basic and diluted (Note 3) ............... 44,832,503 32,789,832 22,505,084
========== ========== ==========
See Report of Certified Public Accountants and accompanying notes
to consolidated financial statements
34
nSTOR TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
=========================================================
(dollars in thousands)
Addi-
Common Stock Preferred Stock tional
------------------------ ----------------------- Paid-in
Shares Amount Shares Amount Capital Deficit Total
----------- ---------- ---------- ---------- ---------- ---------- ---------
Balances, January 1, 1999 ............... 20,515,425 $ 1,025 7,367 $ -- $ 40,409 $ (38,284) $ 3,150
Issuance of convertible
preferred stock in
connection with:
Private placement, net
of issuance costs of $16 ............. 3,500 -- 3,484 3,484
Acquisition of Andataco, net
of issuance costs of $21 ............. 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:
Borrowings ............................ 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,
net of issuance costs of $87 ......... 508,857 25 936 961
Satisfaction of borrowings ............ 439,154 22 1,228 1,250
Executive termination ................. 123,479 -- -- --
Issuance of preferred stock
in satisfaction of borrowings
from director .......................... 2,000 -- 2,000 2,000
35
nSTOR TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
=========================================================
(dollars in thousands) (concluded)
Addi-
Common Stock Preferred Stock tional
------------------------ ----------------------- Paid-in
Shares Amount Shares Amount Capital Deficit Total
----------- ---------- ---------- ---------- ---------- ---------- ---------
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)
Issuance of convertible
preferred stock in
connection with:
Satisfaction of borrowings,
net of issuance costs of $15 ......... 11,942 -- 11,927 11,927
Private placement 250 -- 250 250
Halco Investment, net of
issuance costs of $28 ................ 8,970 -- 8,941 8,941
Issuance of common stock in
connection with:
Conversion of Series D & F
convertible preferred stock .......... 2,240,533 112 (2,722) -- (112) --
Halco Investment (issued
January 11, 2002 upon
shareholder approval- Note 3)
including conversion of
Series H, I, & K convertible
preferred stock ...................... 76,884,122 3,844 (26,662) -- (2,075) 1,769
Common stock option and warrants
issued in connection with:
Borrowings ............................ 554 554
Other ................................. 90 90
Preferred stock dividends ............... (1,560) (1,560)
Induced conversion of convertible
preferred stock ........................ 3,000 (3,000) --
Net loss for the year ended
December 31, 2001 ...................... (13,958) (13,958)
----------- ---------- ---------- ---------- ---------- ---------- --------
Balances, December 31, 2001 ............. 114,603,144 $ 5,729 -- $ -- $ 94,104 $ (99,346) $ 487
=========== ========== ========== ========== ========== ========== ========
See Report of Certified Public Accountants and accompanying notes
to consolidated financial statements
36
nSTOR TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
==========================================
(in thousands)
Years Ended December 31,
--------------------------------
2001 2000 1999
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ........................................... $(13,958) $(21,921) $(18,704)
Adjustments to reconcile net loss to
net cash used in operating activities:
Gain on sale of assets of Borg Adaptive
Technologies .................................. -- (5,575) --
Depreciation and amortization .................. 1,622 4,468 3,355
Impairment of goodwill ......................... -- 11,959 4,588
Extraordinary (gains) losses from debt
extinguishments, net .......................... (869) -- 465
Provision for inventory obsolescence ........... 2,500 3,988 306
Provision for uncollectible accounts receivable 1,069 912 954
Proceeds from sales of marketable securities ... 1,047 -- --
Realized and unrealized losses on marketable
securities, net .............................. 811 -- --
Other income ................................... (627) -- --
Amortization of deferred loan costs and other .. 280 21 922
Changes in assets and liabilities, net of
effects from acquisitions:
Decrease in accounts receivable ............ 1,201 2,108 640
Decrease (increase) in inventories ......... 653 (2,875) 1,459
Decrease in prepaid expenses
and other ................................ 1,090 293 334
(Decrease)increase in deferred revenue,
accounts payable and other liabilities ... (5,152) (2,807) 403
-------- -------- --------
Net cash used in operating activities ................ (10,333) (9,429) (5,278)
-------- -------- --------
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)
Additions to property and equipment ................ (163) (853) (767)
-------- -------- --------
Net cash (used in) provided by investing activities .. (163) 5,867 (2,139)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments of revolving bank credit
facilities ....................................... (1,095) (1,025) (2,590)
Additions to other borrowings ...................... 11,249 4,858 7,075
Repayments on other borrowings ..................... -- (2,285) (1,200)
Issuance of convertible preferred stock ............ 1,221 -- 1,962
Issuance of common stock, net of issuance costs .... -- 961 1,000
Proceeds from exercise of stock options and warrants -- 1,178 2,519
Cash paid for preferred stock dividends ............ (59) (761) (823)
-------- -------- --------
Net cash provided by financing activities ............ 11,316 2,926 7,943
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents during the year ........................ 820 (636) 526
Cash and cash equivalents at beginning of year ....... 37 673 147
-------- -------- --------
Cash and cash equivalents at end of year ............. $ 857 $ 37 $ 673
======== ======== ========
37
nSTOR TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
=========================================
(in thousands) (concluded)
Years Ended December 31,
--------------------------------
2001 2000 1999
-------- -------- --------
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Cash paid during period for interest ............... $ 504 $ 1,297 $ 941
======== ======== ========
NON-CASH INVESTING ACTIVITIES:
Acquisitions:
Fair value of assets acquired .................... $ -- $ 2,938 $ 30,527
Liabilities assumed and incurred ................. -- (45) (21,767)
Common stock, convertible preferred
stock and warrants issued to sellers ............ -- (2,600) (7,388)
-------- -------- --------
Cash paid ........................................ $ -- $ 293 $ 1,372
======== ======== ========
Convertible preferred stock issued to Halco
in exchange for marketable securities ............. $ 6,113 $ -- $ --
======== ======== ========
Modifications to stock options and warrants
in connection with the sale of assets of
Borg Adaptive Technologies ........................ $ -- $ 818 $ --
======== ======== ========
NON-CASH FINANCING ACTIVITIES:
Issuance of common and convertible preferred
stock in satisfaction of borrowings, accrued
dividends and accrued interest .................... $ 15,568 $ 3,250 $ 8,340
======== ======== ========
Deferred loan costs arising from issuance
of warrants under borrowings ...................... $ 554 $ -- $ 791
======== ======== ========
See Report of Certified Public Accountants and accompanying notes
to consolidated financial statements
38
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.
Liquidity and Going Concern
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
experienced negative cash flows from operating activities and has suffered
substantial recurring net losses of $14 million, $21.9 million, and $18.7
million for the years ended December 31, 2001, 2000 and 1999, respectively. In
addition, the Company is not in compliance with certain covenants and provisions
under its bank credit facility and has been advised that the bank does not
intend to renew the credit facility. These matters, among others, raise
substantial doubt about the Company's ability to continue as a going concern.
During most of 2000, the Company's management team formulated and implemented
its current product strategy centered around its NexStor 2U line of Storage Area
Network (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
2001, the decline in revenues of the Company's older products exceeded the
increase in sales of its newer technology solutions. This decline in revenues
combined with the recent decline in economic and market conditions has
significantly contributed to the Company's operating losses.
During 2001, the Company shifted its sales and marketing strategy to provide
greater technical, marketing and sales support to expand the Company's indirect
customer channel base (original equipment manufacturers (OEMs), resellers and
system integrators). As part of this strategy, since January 2001, the Company
has significantly reduced its direct sales personnel and related costs, and is
currently focusing its direct sales team to targeted markets as well as existing
customers.
Since January 1, 2001, and through February 28, 2002, the Company obtained $20.5
million of equity and debt financing from private investors. Of these amounts,
$12.1 million was received in 2001 from Maurice Halperin, the Company's Chairman
of the Board since August 15, 2001 and a principal shareholder, or companies
controlled by Mr. Halperin (collectively "Mr. Halperin"), consisting of $6
million in cash received between August 2001 and November 2001 and $6.1 million
in marketable securities received in November 2001 (see Note 3 to Consolidated
Financial Statements). From November 2001 through March 2002, the Company
received $4 million in cash from the sale of all of the marketable securities
(see Note 6 to Consolidated Financial Statements). Equity and debt financing
obtained from January 2001 through February 28, 2002 also included $2.8 million
from H. Irwin Levy, the Company's Vice-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 in January 2000 when
the Company sold substantially all the assets of its wholly-owned subsidiary,
Borg Adaptive Technologies, Inc. (see Note 4 to Consolidated Financial
Statements).
39
Since the fourth quarter of 2000, the Company has not been in compliance with
its minimum net worth and net income covenants under its bank credit facility.
On February 4, 2002, the bank advised the Company that the outstanding principal
balance exceeded the Company's borrowing base by $1.1 million and demanded
immediate payment of this over-advance. The bank also indicated that the
Company's non-bank indebtedness of approximately $4.7 million was incurred in
violation of the loan agreement. In addition, effective February 4, 2002, the
bank applied certain amendments to the loan agreement (see Note 8 to
Consolidated Financial Statements) and advised the Company that it does not
intend to renew the credit facility when it matures in April 2002. The Company
is currently seeking a replacement lender; however, there can be no assurance
that it will be successful in obtaining a new credit line facility on terms
acceptable to the Company, if at all. As of February 28, 2002, the outstanding
balance of the Bank Line of Credit was $1.3 million.
The Company is currently exploring 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. 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. The Company has insufficient liquidity to fund it's operating needs for
the next twelve months.
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 a designer, developer and manufacturer of attached and SAN
(Storage Area Network) ready data enclosures and Storage Management Software
used in storage solutions for computing operations. Our product line supports a
variety of operating systems, including Windows NT and Windows 2000, Sun
Solaris, Linux, SGI IRIX and Macintosh. Designed for storage intensive
environments such as the Internet or other mission-critical applications, the
Company's products are offered in Fibre Channel, Fibre-to-SCSI (Small Computer
Systems Interface), and SCSI architectures.
Cash and Cash Equivalents
Cash and cash equivalents consist of highly liquid investment instruments with
original maturities, when purchased, of three months or less.
Marketable Securities
In accordance with Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," the
Company's marketable securities are classified as trading securities and
reported at fair value with unrealized gains and losses recognized in earnings.
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 5 to
Consolidated Financial Statements).
40
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. Prior to August 2001, the
Company contracted 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 were
recognized in the financial statements in sales and cost of goods sold,
respectively, over the life of the service contracts. In August 2001, the
Company sold substantially all of its servicing business. The remaining
unamortized deferred revenue was recognized as revenue following the sale.
Warranty Costs
A provision is made for warranty costs in excess of those provided for by the
original equipment manufacturer.
Long-Lived Assets
In accordance with the provisions of SFAS 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of", long-lived
assets and certain identifiable intangibles are 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
Goodwill is carried at cost and amortized under the straight-line method over
seven years, the estimated useful life. Goodwill represents the excess cost of
the acquired businesses over the fair value of net assets acquired (see Notes 2
and 5 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 2000 and 1999, the Company recorded charges for
impairment of goodwill of $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 the
assets of Parity Systems, Inc., respectively. The goodwill was determined to
have been impaired because of the Company's projected inability to generate
sufficient future operating income from the assets acquired in those
acquisitions. At December 31, 2001, unamortized goodwill amounted to $2 million
(see Recent Authoritative Pronouncements).
Research and Development Costs
Research and development costs are expensed as incurred.
41
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.
Net Loss Per Common Share ("EPS")
Basic EPS is calculated by dividing the net loss available to common stock by
the weighted average number of common shares considered 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, 2001 and 2000, outstanding potentially dilutive securities
included the following, respectively: 2,871,294 and 4,549,610 shares underlying
stock options; 3,304,299 and 2,575,133 shares underlying warrants; and
59,877,432 and 3,407,199 shares underlying convertible preferred stock.
Effective January 11, 2002, the Company issued an aggregate of 76,884,122 new
common shares, (the "New Common Shares") pursuant to shareholder approval of the
Halco Investment (see Note 3 to Consolidated Financial Statements). The Halco
Investment was completed on November 20, 2001, subject to shareholder approval;
accordingly, the calculation of basic and diluted EPS assumes that the New
Common Shares were issued as of November 20, 2001. As part of the issuance of
the New Common Shares, all of the Company's convertible preferred stock was
converted to common stock.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America, 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
Statement of Financial Accounting Standards 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, 2001 and 2000.
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
carrying value of the Company's marketable securities equals their quoted market
value. The fair value of the Company's borrowings (current and long-term) 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 their fair value.
42
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.
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
Statement of Financial Accounting Standards No. 130, Reporting Comprehensive
Income, established 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.
Recent Authoritative Pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 141 ("SFAS 141"), Business
Combinations, which requires business combinations initiated after June 30, 2001
to be accounted for using the purchase method of accounting. In addition, SFAS
141 specifies the types of acquired intangible assets that are required to be
recognized and reported separately from goodwill. The Company does not expect
SFAS 141 will have a material impact on the Company's financial position or
results of operations.
In July 2001, the FASB issued SFAS No. 142 ("SFAS 142"), Goodwill and Other
Intangible Assets, which addresses how intangible assets that are acquired
individually or with a group of other assets should be accounted for upon their
acquisition. SFAS No. 142 also addresses how goodwill and other intangible
assets should be accounted for after they have been initially recognized in the
financial statements. SFAS 142 is effective for fiscal years beginning after
December 15, 2001, with earlier adoption permitted. Implementation of SFAS 142
in 2002 will result in the discontinuation of amortization of unamortized
goodwill with a carrying amount of approximately $2 million as of December 31,
2001. Amortization for the year ended December 31, 2001 amounted to $.4 million.
The Company is currently assessing any impairment issues related to SFAS 142.
In October 2001, the FASB issued SFAS No. 144 ("SFAS 144"), Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS 144 establishes the accounting
model for long-lived assets to be disposed of by sale and applies to all
long-lived assets, including discontinued operations. SFAS 144 requires that
those long-lived assets be measured at the lower of carrying amount or fair
value less cost to sell, whether reported in continuing operations or in
discontinued operations. SFAS 144 is effective for financial statements issued
for fiscal years beginning after December 15, 2001 and, generally, is to be
applied prospectively. The Company is currently discussing the impact of SFAS
144. Previously, the Company accounted for long-lived assets under SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of.
43
In June 2000, the FASB issued SFAS No. 138 ("SFAS 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.
(2) ACQUISITIONS
Andataco
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 8 to
Consolidated Financial Statements). Andataco was a developer, manufacturer, and
marketer of high performance, high availability information storage solutions
for the open systems market.
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 fixed 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 2000, the Company recorded an impairment of all
unamortized goodwill related to the Andataco acquisition (see Note 1 to
Consolidated Financial Statements).
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.
44
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) HALCO INVESTMENT
On November 20, 2001 (the "Closing Date"), the Company completed a transaction
in which Halco Investments L.C. (Halco), a company controlled by Mr. Halperin,
acquired a 34% equity interest in, and made certain loans to, the Company for an
aggregate investment of $12.1 million (the Halco Investment). On the Closing
Date, Halco acquired 8,970 shares of the Company's newly created Series K
Convertible Preferred Stock (the "Series K Preferred Stock" - see Note 13 to
Consolidated Financial Statements), with a face amount of $8,970,000, and the
Company issued a $3.1 million, 5-year, 8% note (the "Halco Note"). Halco
invested $6 million in cash and marketable securities having a quoted market
value of $6.1 million, based on the closing price for such securities on
November 19, 2001.
Mr. Halperin first submitted an investment proposal to the Company on June 26,
2001. The Company subsequently negotiated the terms of the offer from July to
November 2001, during which time, Halco made short-term working capital loans to
the Company in the aggregate amount of $5 million at an interest rate of 8% per
annum. Of that amount, at the Closing Date, $3.1 million was converted into the
Halco Note and the remaining amount was applied to the cash paid by Halco for
the Series K Preferred Stock. In connection with Mr. Halperin's proposal and the
interim financing provided by Halco, on August 15, 2001, the Company's board of
directors elected Mr. Halperin as Chairman, replacing the then Chairman, Mr.
Levy, who became Vice Chairman and who is continuing to serve as Chief Executive
Officer of the Company.
In connection with and as conditions to the Halco Investment, it was agreed that
an aggregate of 76,884,122 common shares, (the "New Common Shares") were to be
issued as follows: (i) the Series K Preferred Stock, owned by Halco, was to be
automatically converted into 39,000,000 shares of the Company's common stock,
based upon a conversion price of $.23 per share, upon approval of the Company's
shareholders; (ii) all of the holders of the Company's other convertible
preferred stock (the "Other Preferred Stock") agreed to convert their shares of
preferred stock into common stock (20,877,432 shares of common stock, including
10,752,527 to Mr. Levy); (iii) the Company and the holders of the Other
Preferred Stock agreed to the issuance of: (a) 12,993,072 shares of common
stock, including 6,651,488 to Mr. Levy, to induce those holders to convert their
shares, all of which were entitled to periodic dividends, into shares of common
stock, which had never received a dividend (the "Inducement Shares"), and (b)
3,263,618 shares of common stock, including 1,658,064 to Mr. Levy, (the
"Dividend Shares") in satisfaction of an aggregate of $1.5 million of accrued
dividends (including $.7 million to Mr. Levy) on the date of conversion (the
Inducement Shares and Dividend Shares were based upon a conversion price of $.45
per share); and (iv) Mr. Levy agreed to the receipt of 750,000 shares of the
Company's common stock in exchange for $.3 million owed by the Company to Mr.
Levy (the "Note Shares") based upon a conversion price of $.40 per share.
On the Closing Date, shareholders who owned in excess of 50% of the Company's
voting stock executed proxies to vote in favor of the foregoing transactions.
However, formal shareholder approval of the transactions was required before the
Company could issue the common stock necessary for the conversion of the Series
K Preferred Stock, the Note Shares, the Inducement Shares and the Dividend
Shares, and for an increase in the number of authorized common shares from 75
million to 200 million. On January 10, 2002, shareholder approval was received
and the Company issued the New Common Shares effective January 11, 2002.
Accordingly, to appropriately reflect the financial position of the Company in
the accompanying consolidated financial statements, the foregoing transactions,
as shown in the following table, were assumed to have occurred as of November
20, 2001, the Closing Date of the Halco Investment.
45
Balances at January 10, 2002 New Common Shares
(Considered Converted to New Common Shares Issued Effective January 11, 2002
at December 31, 2001) (Considered Outstanding at December 31, 2001)
- --------------------------------------------------- -----------------------------------------------------
Aggregate Accrued Total
Preferred Number of Stated Value Dividneds Conversion Inducement Dividend New Common
Series Shares (in thousands) Shares Shares Shares Shares
- --------- ----------- ------------------------- ----------- ----------- ----------- -----------
E 3,500 $ 3,500 $ 405 1,166,666 1,166,666 899,665 3,232,997
H 5,100 5,100 383 7,083,333 4,250,000 850,776 12,184,109
I 9,092 9,092 681 12,627,433 7,576,406 1,513,177 21,717,016
K 8,970 8,970 -- 39,000,000 -- -- 39,000,000
----------- ----------- ----------- ----------- ----------- -----------
$ 26,662 $ 1,469 59,877,432 12,993,072 3,263,618 76,134,122
=========== =========== =========== =========== ===========
Note Shares 750,000
-----------
Total New Common Shares issued effective January 11, 2002 76,884,122
Common shares outstanding at December 31, 2001 37,719,022
-----------
Common shares outstanding at January 11, 2002
(considered outstanding at December 31, 2001) 114,603,144
===========
In accordance with the SEC's staff position on an EITF pronouncement (Topic
D-42) relating to induced conversions of preferred stock, the Company recorded a
$3 million non-cash charge to arrive at net loss available to common stock in
2001, representing the fair value of the Inducement Shares. The fair value was
based on $.23 per share, the price paid by Halco for its purchase of 39 million
shares of the Company's common stock.
(4) GAIN ON SALE OF ASSETS OF BORG ADAPTIVE TECHNOLOGIES ("BORG")
On January 10, 2000, the Company sold substantially all of the assets of Borg, 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. 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 in 1999.
(5) BALANCE SHEET COMPONENTS (in thousands)
At December 31, 2001, substantially all assets (excluding marketable securities)
were pledged as collateral for indebtedness (see Note 8 to Consolidated
Financial Statements).
December 31,
---------------------
2001 2000
------- -------
Accounts Receivable
Trade receivables ............................. $ 2,113 $ 4,610
Less allowance for doubtful accounts .......... (209) (402)
------- -------
1,904 4,208
Other receivables ............................. 21 187
------- -------
$ 1,925 $ 4,395
======= =======
45
December 31,
---------------------
2001 2000
------- -------
Prepaid Expenses and Other
Prepaid service costs ......................... $ -- $ 1,175
Other ......................................... 207 103
------- -------
$ 207 $ 1,278
======= =======
Inventories
Raw materials ................................. $ 880 $ 3,784
Work-in-process ............................... 361 213
Finished goods ................................ 123 1,177
------- -------
$ 1,364 $ 5,174
======= =======
During 2001 and 2000, the Company recorded write-downs of $2.5 million and $1.4
million, respectively, resulting from a valuation of certain inventory (see Note
19 to Consolidated Financial Statements).
Property and Equipment
Computer equipment ............................ $ 5,011 $ 4,888
Computer software ............................. 770 770
Leasehold improvements ........................ 866 866
Furniture, fixtures and office equipment ...... 325 321
Other ......................................... 36 122
------- -------
7,008 6,967
Less accumulated depreciation ................. (5,641) (4,583)
------- -------
$ 1,367 $ 2,384
======= =======
Depreciation expense amounted to $1.2 million and $1.9 million for the years
ended December 31, 2001 and 2000, respectively.
Goodwill
Goodwill .................................... $ 2,797 $ 2,797
Less accumulated amortization ............... ( 808) (400)
------- -------
$ 1,989 $ 2,397
======= =======
Amortization of goodwill amounted to $.4 million and $2.6 million for the years
ended December 31, 2001 and 2000, respectively. During 2000 and 1999, the
Company recorded charges for the impairment of goodwill of $12 million and $4.6
million, respectively (See Note 1 to Consolidated Financial Statements).
Accounts Payable and Other
Accounts payable ................................... $ 1,780 $ 6,402
Accrued expenses and other
current liabilities ............................... 2,010 3,102
------- -------
$ 3,790 $ 9,504
======= =======
47
(6) TRADING MARKETABLE SECURITIES
In connection with the Halco Investment (see Note 3 to Consolidated Financial
Statements) on November 20, 2001, the Company received marketable securities
with a quoted market value of $6.1 million, including approximately 434,000
shares of American Realty Investors Inc. ("ARL"), a New York Stock Exchange
listed company, with a quoted market value of $5.2 million. Through December 31,
2001, the Company received net cash proceeds of $1,047,000 principally from the
sale of all of the non-ARL securities, and realized a gain of $86,000.
Unrealized losses at December 31, 2001 on the ARL shares were $897,000,
resulting in a net loss of $811,000.
Due to ARL's low trading volume, the Company's ability to sell or borrow against
the ARL holdings had been extremely limited. From November 2001 through 2002,
the Company had been able to sell only 56,300 shares in the public market,
generating cash proceeds of $442,000. To assist in funding the Company's working
capital requirements, in February and March 2002, the Company and Mr. Levy
entered into agreements whereby Mr. Levy purchased 195,000 shares of ARL with an
aggregate quoted value of $1,470,000 on the respective purchase dates for an
aggregate purchase price of $1,240,000. In connection therewith, Mr. Levy
granted the Company four month options to repurchase all or a portion of those
shares based on the price Mr. Levy paid plus 10% per annum. In February and
March 2002, the Company sold 183,000 shares, representing all of its remaining
holdings in ARL, to Mr. Halperin for an aggregate purchase price of $1,278,000,
which approximated ARL's quoted value on the respective purchase dates. As a
result of the 2002 ARL sales, the Company will realize a loss of $2,054,000
during its first quarter.
(7) 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 loss before income taxes
follows (dollars in thousands):
Years Ended December 31,
-------------------------------
2001 2000 1999
------- ------- -------
Amount computed at federal statutory
rate of 34% .............................. $(4,745) $(7,453) $(6,359)
Impairment of goodwill not
deductible for tax ....................... -- 4,065 --
Non-deductible amortization of in-
tangible assets .......................... 127 840 533
Expenses not deductible for tax
purposes ................................. 80 62 159
Losses not deductible for tax purposes ..... 123 425 158
Exercise of non-qualified stock options .... -- (44) (272)
Losses for which no current benefits
are available ............................ 4,415 2,105 5,781
------- ------- -------
Provision for income taxes ................. $ -- $ -- $ --
======= ======= =======
48
The tax effects of temporary differences that gave rise to significant portions
of deferred tax assets are as follows (in thousands):
December 31,
-----------------------------
2001 2000
-------- --------
Deferred tax assets:
Net operating loss carryforwards .......... $ 18,643 $ 14,128
Alternative minimum tax carryforwards ..... 770 770
Research and development credit
carryforwards ........................... 1,244 1,244
Depreciation and amortization ............. 1,923 (152)
Allowance for doubtful accounts ........... 3 137
Inventory and warranty reserves ........... 1,587 1,786
-------- --------
Net deferred tax assets ...................... 24,170 17,913
Less valuation allowance ..................... (24,170) (17,913)
-------- --------
Deferred taxes ............................... $ -- $ --
======== ========
At December 31, 2001 and 2000, 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, 2001, there were unused net operating loss carryforwards (the
"NOL's") for regular federal tax purposes of approximately $54.8 million and
approximately $11.5 million for California tax purposes, expiring from 2012
through 2021 and 2002 through 2011, 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, 2001, 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's and approximately $2 million of the
California NOL's 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.
(8) BORROWINGS
Revolving Credit Facility (Bank Line of Credit)
At December 31, 2001, the Bank Line of Credit, as amended, provided for
borrowings based on the lesser of $10 million or: (i) 85% of eligible accounts
receivable, as defined, plus (ii) the lesser of $1.25 million or 20% of eligible
inventory, as defined (collectively, the "Borrowing Base"). The Bank Line of
Credit bore interest at prime (4.75% at December 31, 2001) plus 2.5%, matures in
April 2002, requires a facility fee of .25% based on the average unused portion
of the maximum borrowings, 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, 2001, the
outstanding balance of the Bank Line of Credit was $3 million.
49
Since the fourth quarter of 2000, the Company has not been in compliance with
the minimum net worth and net income requirements under the Bank Line of Credit.
On February 4, 2002, the bank advised the Company that the outstanding principal
balance exceeded the Borrowing Base by $1.1 million and demanded immediate
payment of the over-advance. The bank also indicated that the Company's non-bank
indebtedness of approximately $4.7 million was incurred in violation of the loan
agreement. In addition, effective February 4, 2002, the bank applied the
following amendments to the Bank Line of Credit: (1) an increase in the interest
rate to prime plus 3.5%, (2) a decrease in the overall facility to $3.5 million;
and (3) a reduction in the inventory borrowing limit to $900,000 with further
reductions of 2% of eligible inventory per week, effective February 12, 2002.
The bank advised the Company that it does not intend to renew the Bank Line of
Credit. The Company is currently seeking a replacement lender; however, there is
no assurance that it will be successful in obtaining a new credit facility on
terms acceptable to the Company, if at all.
Other Borrowings
The Company's other borrowings consisted of the following (in thousands):
December 31,
------------------
2001 2000
------ ------
Current:
Notes payable, interest at 10% per annum,
maturing on December 15, 2002, including
$650,000 to Mr. Levy ................................. $1,100 $ --
====== ======
Long-term:
Halco Note, interest only at 8% per annum,
payable quarterly, maturing
on November 20, 2006 ................................. $3,100 $ --
Notes payable to affiliates of Mr. Sykes,
interest only at 8% per annum, payable
monthly, maturing on June 6, 2003 .................... 500 --
Notes payable to affiliates of Mr. Sykes in
connection with Andataco acquisition,
interest at 9% per annum (exchanged for
Series H Convertible Preferred Stock
on April 12, 2001 (see below) ........................ -- 5,100
Notes payable, interest at 10% per annum,
payable quarterly, including $1,658 to
Mr. Levy (exchanged for Series I Convertible
Preferred Stock on April 12, 2001 (see
below)) .............................................. -- 2,158
------ ------
$3,600 $7,258
====== ======
At December 31, 2000, the Company's aggregate borrowings were $7.3 million
including $1.7 million owed to Mr. Levy at 10% per annum. From January 2001
through March 31, 2001, the Company borrowed an additional $4.5 million
(including $1.9 million from Mr. Levy), of which $3.8 million (including $1.3
million from Mr. Levy) was convertible into the Company's common stock at $1.00
per share. In connection with certain of this debt, the Company issued warrants
to purchase an aggregate of 1,137,500 shares (including 512,500 warrants to Mr.
Levy) of the Company's common stock, principally at $1.20 per share, exercisable
at issuance and expiring, principally on March 31, 2004. The warrants were
valued based on the Black-Scholes option-pricing model as of the dates of
issuance at an aggregate of $396,000 and were recorded as a discount to the
notes.
50
Effective April 12, 2001, holders of all of the Company's notes payable totaling
$11.9 million (including accrued interest) on that date (including $3.6 million
due to Mr. Levy) exchanged their notes for Series H and Series I Convertible
Preferred Stock (see Note 13 to Consolidated Financial Statements) with a stated
value of $11.9 million.
From May 2001 through the closing of the Halco Investment in November 2001, the
Company borrowed an additional $6.9 million, including $5 million of short-term
borrowings from Halco and $1.45 million from Mr. Levy. Effective on the Closing
Date of the Halco Investment, (i) the $5 million of short-term borrowings from
Halco was satisfied by the conversion of $3.1 million into the Halco Note and
the application of $1.9 million to the amount paid by Halco for the Series K
convertible Preferred Stock and (ii) the Company agreed to satisfy $.3 million
of borrowings from Mr. Levy by issuing 750,000 shares of the Company's common
stock (see Note 3 to Consolidated Financial Statements). In addition, in
December 2001, Mr. Levy assigned $.5 million of his loans to affiliates of Mr.
Sykes in a private transaction in which Mr. Levy purchased Series H Convertible
Preferred Stock with a face amount of $1.7 million from affiliates of Mr. Sykes.
In connection with certain borrowings during 2001, the Company issued warrants
to purchase an aggregate of 625,000 shares (including 400,000 warrants to Mr.
Levy) of the Company's common stock at exercise prices ranging from $.45 to $.75
per share, exercisable at issuance and expiring on June 30, 2004. The warrants
were valued based on the Black-Scholes option-pricing model as of the dates of
issuance at an aggregate of $155,000 and were recorded as a discount to the
notes.
At December 31, 1999, borrowings included $1.6 million due to Mr. Levy, which
was satisfied in full in January 2000. Between June and December 2000, Mr. Levy
advanced an additional $4.4 million to the Company. Of those amounts, the
Company repaid $.7 million and satisfied $2 million by issuing shares of the
Company's Series G Preferred Stock with a face amount of $2 million (see Note 13
to Consolidated Financial Statements).
In connection with certain borrowings from 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. The warrant was valued based on the Black-Scholes option-pricing
model as of the date of issuance at $87,500 and was recorded as a discount to
the notes.
In April and December 2000, borrowings amounting to $1.2 million were satisfied
in full by the issuance of 439,154 shares of the Company's common stock.
In connection with the issuance of $1.8 million of long-term debt in January
1999, the Company issued warrants to purchase 600,000 shares of the Company's
common stock, including warrants to purchase 200,000 shares of the Company's
common stock to Mr. Halperin. The warrants were valued based on the
Black-Scholes option-pricing model as of the date of issuance at an aggregate of
$.8 million and were recorded as a discount to the long-term debt, of which $.4
million was amortized as interest expense for the year ended December 31, 1999.
As discussed below, the remaining unamortized discount of $.4 million was
recorded as an extraordinary loss on extinguishment of debt when the debt was
satisfied in December 1999.
In March 1999, the Company issued 645,000 shares of the Company's common stock
in full satisfaction of $1.3 million of borrowings, consisting of 395,000 shares
of common stock to Mr. Levy in satisfaction of $.8 million of borrowings and
250,000 shares of common stock to Mr. Halperin in satisfaction of $.5 million of
borrowings.
51
In December 1999, the Company issued 1,878,462 shares of its common stock in
full satisfaction of an aggregate 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. On the date of satisfaction, the aggregate unamortized discount on the
notes of $.5 million was recorded as an extraordinary loss on extinguishment of
debt.
Interest paid to Mr. Levy was $0, $134,000, and $112,000 in 2001, 2000 and 1999,
respectively. Interest paid to Mr. Halperin was $81,000 in 2001.
Maturities
Scheduled and estimated maturities of the Company's borrowings, including the
Bank Line of Credit, are as follows (in thousands):
Years ending December 31,
2002 $4,091
2003 500
2004 -
2005 -
2006 3,100
------
Total payments 7,691
Less current portion (4,091)
------
Long-term portion $3,600
======
(9) EXTRAORDINARY GAINS
During 2001, the Company recognized $869,000 of net extraordinary gains
consisting of $1,231,000 of extraordinary gains from negotiated discounts with
vendors, less a $362,000 extraordinary loss, representing the unamortized
discount on certain notes payable exchanged for Series I Convertible Preferred
Stock effective April 12, 2001 (see Note 8 to Consolidated Financial
Statements).
During 1999, the Company recognized a $465,000 extraordinary loss, representing
the unamortized discount on certain notes payable exchanged for shares of the
Company's common stock in December 1999.
(10) 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, systems 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 2001, one
customer accounted for 12% of sales. During 2000, no single customer accounted
for more than 10% of sales. During 1999, sales to two customers accounted for
15% and 11% of total sales. Sales to geographic areas other than the United
States have not been significant.
52
(11) 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.
In February 2002, Mr. Sykes filed a complaint in the Circuit Court of Palm Beach
County, Florida, against a subsidiary of the Company in which Mr. Sykes claims
he was wrongfully terminated under provisions of the employment agreement
between Mr. Sykes and the subsidiary. The Company believes it acted in
accordance with the termination provisions of the agreement and that no further
compensation or benefits are due to Mr. Sykes. The Company believes that it has
good defenses to the claim and that it will not incur any material liability.
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, operations or cash flows.
(12) COMMON STOCK
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 ("Equity Agreement"). The Equity Agreement did not obligate the
Company to draw any of the funds. Once per draw down period, the Company could
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 would provide to
the Company and the number of shares the Company would issue to the investment
group in return for that money was 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 received a 7% discount to the
market price for the 22-day period and the Company received the settled amount
of the draw down less a 4% fee payable to the placement agent.
In connection with the Equity 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.
Effective September 28, 2001, the Company terminated the Equity Agreement. The
aggregate number of common shares issued by the Company under the Equity
Agreement was 508,857 shares, for which it received net proceeds of
approximately $1 million, all of which occurred in 2000. 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 2000.
Pursuant to state law, the Company may be restricted from paying dividends to
its holders of common stock under certain conditions.
53
(13) 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, the Company recorded $.3 million as an
additional embedded dividend attributable to the beneficial conversion privilege
on its convertible preferred stock.
Series A
The Series A Preferred Stock accrued dividends in 1999 and 2000 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, consisting of 1,667 shares with a stated value of
$1 million, was converted into 1,666,667 shares of the Company's common stock.
Series C
The Series C Preferred Stock accrued dividends in 1999 and 2000 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,
all of the Series C Preferred Stock, consisting of 3,000 shares with a stated
value of $3 million held by Mr. Levy, was converted into 3,000,000 shares of the
Company's common stock in accordance with an automatic conversion requirement.
Series D
The Series D Preferred Stock accrued dividends in 1999, 2000 and 2001 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. On February
1, 2000, 700 shares of the Series D Preferred Stock with a stated value of
$700,000 was converted into 700,000 shares of the Company's common stock.
Pursuant to an automatic conversion feature, effective October 28, 2001, the
remaining 2,000 shares with a stated value of $2,000,000 was converted into 2
million shares of the Company's common stock.
Series E
In June 1999, the Company issued 3,500 shares of Series E Convertible Preferred
Stock 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, accrued 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 was convertible
into shares of the Company's common stock based on a fixed conversion price of
$3.00 per share. In connection with the Halco Investment, on January 11, 2002,
all of the Series E Preferred Stock was converted into shares of the Company's
common stock (see Note 3 to Consolidated Financial Statements).
Series F
As part of the acquisition of Andataco in June 1999, the Company issued 4,654
shares of Series F Convertible Preferred Stock to Mr. Sykes, with a stated value
of $4.7 million, which accrued quarterly dividends at the following annual
rates: 8% during the first year, 9% during the second year and 10% thereafter.
The Series F Preferred Stock was convertible into the Company's common stock
based on a fixed conversion price of $3.00 per share. During 2001, 2000 and
1999, 722, 3,332 and 600 shares, respectively, representing all of the Series F
Preferred Stock, were converted into 240,533, 1,110,800 and 200,000 shares,
respectively, of the Company's common stock.
54
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 "Warrant"). The Warrant provided that if any portion of
the Series G Preferred Stock was redeemed by the Company prior to June 30, 2001,
a corresponding pro-rata portion of the Warrant would be cancelled. Effective
April 12, 2001, the Series G Preferred Stock and accrued dividends thereon of
$57,000 were exchanged for Series I Convertible Preferred Stock, with a stated
value of $2,057,000, and the Warrant was cancelled.
Series H
Effective April 12, 2001, the Company satisfied $5.1 million of borrowings by
issuing 5,100 shares of Series H Convertible Preferred Stock. The Series H
Preferred Stock had a stated value of $5.1 million, accrued dividends at 10%
annum, payable quarterly, and was convertible into shares of the Company's
common stock based on a fixed conversion price of $.72 per share. In connection
with the Halco Investment, on January 11, 2002, all of the Series H Preferred
Stock was converted into shares of the Company's common stock (see Note 3 to
Consolidated Financial Statements).
Series I
Effective April 12, 2001, the Company exchanged $6,675,000 of borrowings
(including $3,550,000 from Mr. Levy), $110,000 in accrued interest, and the
Series G Preferred Stock held by Mr. Levy with a stated value of $2,057,000
(including accrued dividends) for 8,842 shares of Series I Convertible Preferred
Stock with a stated value of $8,842,000. On April 24, 2001, the Company issued
an additional 250 shares, to a private investor, of Series I Preferred Stock
with a stated value of $250,000, for $250,000 in cash. The Series I Preferred
Stock had an aggregate stated value of $9.1 million, accrued dividends at 10%
annum, payable quarterly, and was convertible into shares of the Company's
common stock based on a fixed conversion price of $.72 per share. In connection
with the Halco Investment, on January 11, 2002, all of the Series I Preferred
Stock was converted into shares of the Company's common stock (see Note 3 to
Consolidated Financial Statements).
Series K
On November 20, 2001, the Company issued 8,970 shares of Series K Convertible
Preferred Stock to Halco as part of the Halco Investment for approximately $2.9
million in cash and $6.1 million of marketable securities. The Series K
Preferred Stock had an aggregate stated value of $8,970,000, was not entitled to
receive dividends and was convertible into shares of the Company's common stock
based on a fixed conversion price of $.23 per share. On January 11, 2002, all of
the Series K Preferred Stock was converted into shares of the Company's common
stock (see Note 3 to Consolidated Financial Statements).
55
(14) 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 stock option 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 values on the date of grant over the exercise price.
Under the Company's 1996 Stock Option Plan (the "1996 Plan"), stock options to
purchase up to seven million shares of the Company's common stock were available
to be granted to officers, directors, key employees and non-employees. The
maximum term of the options which have been granted under the 1996 Plan is ten
years and generally vest over three years annually on an equal basis.
Effective January 10, 2002, the Company's stockholders approved the Company's
2001 Stock Option Plan (the "2001 Plan"), under which stock options to purchase
up to five million shares of the Company's common stock may be issued for a
maximum term of ten years. In connection with the 2001 Plan, the Company ceased
granting options under the 1996 Plan and all shares reserved for issuance under
the 1996 Plan for stock options that have not yet been issued were cancelled.
The terms of options previously granted under the 1996 Plan will continue to be
governed by the 1996 Plan and the option agreements currently in effect for
those options.
SFAS No. 123, Accounting for Stock-Based Compensation ("SFAS 123"), requires the
Company to provide pro forma information regarding net income and earnings per
share as if compensation cost for stock options granted 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 90% to 111% for 2001, 96% to 107% for 2000, and
60% for 1999; and risk-free interest rates ranging from 3.1% to 3.8% for 2001,
4.9% to 5.1% for 2000, 5.6% for 1999.
If the Company had elected to recognize stock-based employee compensation costs
based on the fair value on the date of grant consistent with the provisions of
SFAS No. 123, net loss available to common stock and basic and diluted net loss
per common share would have been increased to the following amounts (in
thousands, except per share):
Years Ended December 31,
--------------------------------------
2001 2000 1999
---------- ---------- ----------
Net loss available to common stock:
As reported ........................ ($ 18,518) ($ 22,606) ($ 19,938)
Pro forma .......................... ($ 19,414) ($ 24,112) ($ 20,108)
Basic and diluted net loss
per common share:
As reported ........................ ($ .41) ($ .69) ($ .89)
Pro forma .......................... ($ .43) ($ .73) ($ .89)
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, 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
------- -------
56
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
Granted - exceeded
market value ................ 200 1.10 .59
Granted - equal to
market value ................ 533 .69 .50
Forfeited ..................... (2,411) 2.64
------- -------
Balance, December 31, 2001 ...... 2,871 $ 2.45
======= =======
- -------
(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 1996 Plan. On November 1, 1999, the
shareholders of the Company approved the amendment of the 1996 Plan to increase
the number of shares reserved for issuance from 2,500,000 to 7,000,000.
At December 31, 2001, 2000 and 1999, 1,906,915, 1,371,000, and 853,000,
respectively, of the outstanding options were exercisable with a
weighted-average exercise price of $1.89, $2.29, and $2.20, respectively, per
share. The number of shares available to grant under the 1996 Plan was 3,056,456
and 1,378,140 as of December 31, 2001 and 2000, respectively. As a result of
shareholder approval of the 2001 Plan on January 10, 2002, all shares available
to be granted under the 1996 Plan were cancelled and on that date, options to
purchase five million shares were available to grant under the 2001 Plan.
The following table summarizes information about fixed stock options at December
31, 2001:
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 2001 Life Price 2001 Options
(in thousands) (in thousands)
- ----------- -------------- ----------- -------- -------------- -----------
$ .26-$1.00 549 6.3 years $ .56 405 $ .57
$1.03-$2.00 1,206 8.2 years $1.52 666 $1.47
$2.03-$2.94 701 6.9 years $2.43 536 $2.35
$3.00-$3.35 190 8.0 years $3.28 78 $3.19
$4.00-$5.44 225 5.3 years $4.07 222 $4.05
----- ---------- ----- ----- -----
2,871 7.3 years $1.87 1,907 $1.89
===== ========== ===== ===== =====
57
At December 31, 2001, the Company had outstanding warrants under which 3,304,299
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, 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
Warrants issued ................... 1,562 $ .45-$1.20 1,455,000
Warrants expired .................. (333) $ 1.25 (417,000)
Warrants canceled ................. (500) $ 1.50 (750,000)
----------- ------------ -----------
Balance, December 31, 2001 ........ 3,304 $ .45-$3.60 $ 5,794,000
=========== ============ ===========
Number of
Shares Subject
Expiration to Warrants Exercise
Date (in thousands) Priceds
-------------- ---------------- ---------
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
March 2004 .............. 937 $ 1.20
June 2004 ............... 625 $.45-$.75
--------
3,304
========
The Company had reserved common stock for the following purposes (in thousands):
December 31, January 10,
2001 2002
------------ ----------
1996 Plan:
Options outstanding ............................. 2,871 2,871
Options available to grant ...................... 3,057 --
------ ------
Total under 1996 Plan .......................... 5,928 2,871
------ ------
2001 Plan:
Options outstanding ............................. -- --
Options available to grant ...................... -- 5,000
------ ------
Total under 2001 Plan .......................... -- 5,000
------ ------
Total options reserved ......................... 5,928 7,871
------ ------
Warrants outstanding ............................. 3,304 3,304
------ ------
Total options and warrant reserved ............. 9,232 11,175
====== ======
58
(15) 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 $331,000
in 2001 and 2000, and $193,000 during 1999 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 Vice President and Treasurer,
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.
Executive Management
Effective June 22, 2001, the Company and Larry Hemmerich ("Mr. Hemmerich"), the
Company's former President and Chief Executive Officer, entered into a
Separation Agreement in which Mr. Hemmerich's employment ceased and he became a
consultant to the Company through December 31, 2001. Pursuant to the Separation
Agreement, previously granted options to purchase 1,250,000 shares of the
Company's common stock were terminated and replaced with an option to purchase
300,000 shares of common stock at $.45 per share. The option was valued at
$90,000 based on the Black-Scholes option-pricing model as of the date of
issuance and was expensed as compensation over the six month period for which
Mr. Hemmerich was a consultant to the Company.
In connection with Mr. Hemmerich's 2000 bonus, on January 17, 2001, the Company
issued a $125,000, 10% note to Mr. Hemmerich, payable on June 30, 2001.
Effective April 12, 2001, Mr. Hemmerich exchanged this note, including the
accrued interest, for Series I Convertible Preferred Stock with a stated value
of $128,000, convertible into shares of the Company's common stock based on a
fixed conversion price of $.72 per share. Effective with the Halco Investment in
November 2001, the Series I Convertible Preferred Stock held by Mr. Hemmerich
and all accrued dividends thereon were converted to 305,585 shares of common
stock, including 106,594 Inducement Shares and 21,338 Dividend Shares (see Note
3 and 13 to Consolidated Financial Statements).
Mr. Hemmerich served as a director of the Company until March 2002.
(16) LEASES
The Company leases its operating facilities under operating leases which expire
at various dates through March 2003. At December 31, 2001, future minimum rental
payments under operating leases that have initial or remaining terms in excess
of one year were as follows (in thousands):
Total
-------
2002 $ 331
2003 55
-------
$ 386
=======
Rent expense was $831,000, $871,000 and $790,000 during 2001, 2000 and 1999,
respectively.
59
(17) 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, 2001.
(18) FOURTH QUARTER ADJUSTMENTS
During the fourth quarter of 2001, the Company recorded a write-down of $2.5
million resulting from a valuation of certain inventory, which included obsolete
inventory and components associated with products which the Company has phased
out. Management was unable to reasonably estimate the effect, if any, of these
adjustments on prior quarters in 2001.
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 valuation of certain inventory, which included obsolete inventory and
components associated with products which the Company had phased 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 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.
(19) QUARTERLY RESULTS OF OPERATIONS (Unaudited)
The following is a summary of the quarterly operations for the years ended
December 31, 2001 and 2000 (in thousands).
2001 Mar. 31 Jun. 30 Sept. 30 Dec. 31(b)
- ---- -------------------------------------------------
Sales ..................... $ 6,218 $ 3,953 $ 4,016 $ 3,699
Gross profit (loss) ....... 1,713 903 1,399 (1,966)
Loss from operations ...... (3,157) (3,165) (2,171) (5,013)
Net loss .................. (3,445) (3,880) (1,179) (5,454)
Net loss available
to common stock ......... (3,630) (4,324) (1,665) (8,899)
Net loss per common share:
Basic ................... $ (.10) $ (.12) $ (.05) $ (.12)
Diluted ................. $ (.10) $ (.12) $ (.05) $ (.12)
2000
- ----
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) (17,296)
Net income (loss) ......... (a) 2,650 (2,896) (4,028) (17,647)
Net income (loss) available
to common stock ......... (a) 2,439 (3,088) (4,171) (17,786)
Net income (loss) per
common share:
Basic ................. $ .08 $ (.10) $ (.12) $ (.51)
Diluted ............... $ .07 $ (.10) $ (.12) $ (.51)
- ----------
(a) Includes $5.6 million gain on Borg Sale.
(b) See Note 18 regarding Fourth Quarter Adjustments.
60
(20) SUBSEQUENT EVENT
Effective March 1, 2002, the Company entered into a Reseller Agreement with a
wholly-owned subsidiary ("Pacific") of Pacific Electric Wire & Cable Company,
Ltd. The Agreement grants Pacific the right to market and sell the Company's
products for a period of two (2) years in Mainland China and Taiwan on an
exclusive basis, and in the United States and Europe on a non-exclusive basis.
The exclusivity right is conditioned upon minimum purchases by Pacific of $5
million through February 28, 2003 and $10 million during the subsequent year,
and upon the parties agreeing, by the end of May 2002, on specific purchase
prices to be paid by Pacific.
In connection with its efforts to develop further strategic business
relationships with Pacific, effective March 1, 2002, the Company granted Pacific
a nine-month option to purchase up to thirty (30) million newly issued shares of
the Company's common stock for a purchase price of $.40 per share, expiring on
November 30, 2002. The option will be valued as of the date of grant based on
the Black-Scholes option-pricing model and other provisions of SFAS 123.
61
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors of
nStor Technologies, Inc.
The audit referred to in our report dated March 12, 2002 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 audit.
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 significant recurring losses,
minimal working capital, serious liquidity concerns, minimal shareholders'
equity, 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.
The consolidated financial statements of nStor Technologies, Inc. and
subsidiaries as of December 31, 2000 were audited by other auditors whose report
dated February 9, 2001, except as to Paragraph four of Note 6 and Note 15, which
are as of March 27, 2001, and included in this Form 10-K, on those statements
included an explanatory paragraph describing conditions that raise substantial
doubt about the Company's ability to continue as a going concern.
/s/ Swenson Advisors, LLP
Swenson Advisors, LLP
San Diego, California
April 4, 2002
62
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 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 losses 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
63
nSTOR TECHNOLOGIES, INC.
Schedule I--Condensed Financial Information of Registrant
Fiscal Years Ended December 31, 2001 and 2000
The following represents the condensed unconsolidated balance sheet for nStor
Technologies, Inc. as of December 31, 2001 and 2000, and the condensed
unconsolidated statements of operations and cash flows for the years ended
December 31, 2001 and 2000.
CONDENSED UNCONSOLIDATED BALANCE SHEETS
(in thousands)
December 31,
ASSETS 2001 2000
- ------ ------- -------
Current assets:
Cash and cash equivalents ..................... $ 399 $ 8
Marketable securities ......................... 4,255 --
------- -------
Total current assets ............................ 4,654 8
Investments in and receivables from
subsidiaries .................................. (243) 579
------- -------
$ 4,411 $ 587
======= =======
LIABILITIES
- -----------
Current liabilities:
Borrowings ................................... $ -- $ 2,158
Accounts payable and other ................... 324 855
------- -------
Total current liabilities ....................... 324 3,013
Long-term debt .................................. 3,600 5,100
------- -------
Total liabilities ....................... 3,924 8,113
------- -------
SHAREHOLDERS' EQUITY
- --------------------
Preferred stock, $.01 par; 1,000,000 shares
authorized, in order of preference:
Convertible (except for Series G)
preferred stock assumed issued and
outstanding as of December 31, 2001 and 2000,
respectively:
Series F, 0 and 722, aggregate liquidation value
$0 and $722; Series D, 0 and 2,000,
aggregate liquidation value $0 and $2,000;
Series E, 0 and 3,500, aggregate
liquidation value $0 and $3,500; Series G,
0 and 2,000,aggregate liquidation
value $0 and $2,000 .......................... -- --
Common stock, $.05 par; 200,000,000 shares
authorized; 114,603,144 and 35,478,489 shares
assumed issued and outstanding at December 31,
2001 and December 31, 2000, respectively ....... 5,729 1,773
Additional paid-in capital ...................... 94,104 71,529
Deficit ......................................... (99,346) (80,828)
------- -------
Total shareholders' equity (deficit) ............ 487 7,526
------- -------
$ 4,411 $ 587
======= =======
64
nSTOR TECHNOLOGIES, INC.
Schedule I--Condensed Financial Information of Registrant
CONDENSED UNCONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
Years Ended
December 31,
2001 2000
-------- --------
Loss from investment in subsidiaries ............... ($12,556) ($20,964)
Other income ....................................... 627 44
Realized and unrealized losses on
marketable securities, net ....................... (811) --
Selling, general and administrative expense ........ (214) (319)
Interest expense ................................... (642) (682)
-------- --------
Loss before preferred dividends and
extraordinary loss ............................... (13,596) (21,921)
Extraordinary loss from debt extinguishments
(net of tax of $0) ............................... (362) --
-------- --------
Net loss ........................................... (13,958) (21,921)
Preferred stock dividends .......................... (1,560) (685)
Induced conversion of convertible
preferred stock .................................. (3,000) --
-------- --------
Loss available to common stock ..................... ($18,518) ($22,606)
======== ========
65
nSTOR TECHNOLOGIES, INC.
Schedule I--Condensed Financial Information of Registrant
CONDENSED UNCONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Years Ended
December 31,
2001 2000
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ............................................. ($13,958) ($21,921)
Adjustments to reconcile net loss to
net cash used by operating activities:
Gain on sale of assets of Borg Adaptive
Technologies ................................... -- (5,575)
Proceeds from sales of marketable securities ..... 1,047 --
Realized and unrealized losses on
marketable securities ........................... 811 --
Other Income ..................................... (627) --
Amortization of deferred loan costs .............. 190 21
Amortization of deferred compensation costs ...... 90 --
Loss of extinguishments of debt .................. 362 --
Changes in assets and liabilities, net of
effects from acquisition:
Decrease in receivables from subsidiaries ...... 934 16,684
Decrease (increase) in prepaid expenses
and other ..................................... -- 147
(Decrease) increase in accounts payable
and other liabilities ......................... 231 (485)
-------- --------
Net cash used by operating activities .................. (10,920) (11,129)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for acquisitions ........................... -- (293)
Net proceeds from sale of assets of Borg
Adaptive Technologies .............................. -- 7,013
-------- --------
Net cash provided by investing activities .............. -- 6,720
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings ............................. 10,149 4,858
Repayments on borrowings ............................. -- (2,285)
Issuance of common stock, net of issuance cost ....... -- 961
Issuance of convertible preferred stock, net of costs 1,221 --
Proceeds from exercise of stock options and warrants . -- 1,178
Cash paid for preferred stock dividends .............. (59) (761)
-------- --------
Net cash provided by financing activities .............. 11,311 3,951
-------- --------
Net increase (decrease) in cash and cash equivalents
during the year ...................................... 391 (458)
Cash and cash equivalents at beginning of year ......... 8 466
-------- --------
Cash and cash equivalents at end of year ............... $ 399 $ 8
======== ========
66
nSTOR TECHNOLOGIES, INC.
Schedule II-- Valuation and Qualifying Accounts
Fiscal Years Ended December 31, 2001, 2000 and 1999
(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:
2001 $ 402 $1,069 $ 200 $(1,462) $ 209
2000 1,604 912 -- (2,114) 402
1999 502 954 228 (80) 1,604
Allowance for Inventory
Obsolescence:
2001 $4,902 $2,500 $ -- $(3,057) $4,345
2000 3,419 3,988 -- (2,505) 4,902
1999 428 306 3,276 (591) 3,419
- ---------
* Deductions represent amounts written off against the allowance, net of recoveries
67
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 2002 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.
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 29 of this Form 10-K.
(2) Financial Statement Schedule I - Condensed Financial Information
of Registrant - See pages 63 - 65.
(3) Financial Statement Schedule II - Valuation and Qualifying
Accounts - See page 66.
(4) Exhibits - See Exhibit Index at page 69 - 72 of this Form 10-K.
(b) The Registrant filed reports on Form 8-K during the fourth
quarter of 2000 as follows:
(i) A report on Form 8-K dated November 30, 2001 and filed
December 13, 2001, reporting under Item 4 - Changes in
Registrant's Certifying Accountant:
68
a) On December 11, 2001, the Registrant engaged the
accounting firm of Swenson Advisors, LLP (Swenson) as its
independent certifying accountants for the remainder of the
fiscal year ending December 31, 2001.
b) On November 30, 2001, the Registrant notified BDO
Seidman, LLP (BDO) of their dismissal. BDO was the independent
certifying accountant previously engaged to audit the
Registrant's financial statements for the period ended December
31, 2000.
c) The Registrant's engagement of Swenson and the
dismissal of BDO were recommended by the Registrant's Audit
Committee and approved by the Registrant's Board of Directors.
d) During the two fiscal years ended December 31, 1999 and
December 31, 2000, and through the subsequent interim period
ended November 30, 2001, there were no disagreements with BDO on
any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure, which
disagreements if not resolved to the satisfaction of BDO would
have caused that firm to make reference in connection with its
report on the financial statements for the Registrant for such
years.
e) During the two fiscal years ended December 31, 1999 and
December 31, 2000, and through the subsequent interim period
ended September 30, 2001, in accordance with Rule 304 (a)(1)(iv)
and in conjunction with the audit of the Registrant's financial
statements for the fiscal year ended December 31, 2000, and in
conjunction with the review of the Registrant's financial
statements for the quarter ended September 30, 2001, there were
no reportable events.
f) The Registrant has authorized BDO to respond fully
to all inquiries of Swenson.
The reports of BDO on the financial statements as
of and for the years ended December 31, 1999 and December 31,
2000, contained no adverse opinions or disclaimers of opinion,
and were not modified or qualified as to audit scope or
accounting principles, but did contain modifications as to the
Registrant's ability to continue as a going concern for the year
ended December 31, 2000.
g) The Registrant requested that BDO furnish a letter to
the Registrant addressed to the Securities and Exchange
Commission stating whether or not it agreed with the above
statements. A copy of BDO's letter to the Securities and Exchange
Commission, dated December 11, 2001 was filed as Exhibit 16.1 to
the Form 8-K
(ii) A report on Form 8-K dated November 20, 2001 and filed
November 28, 2001, reporting under Item 5 - Other Events, in
which the Registrant announced the completion of a transaction
between the Registrant and Halco Investments, L.C.
69
EXHIBIT INDEX
Exhibit
Number Description
2.1 Asset Purchase Agreement, dated January 10, 2000, by and among nStor
Corporation, Inc., Borg Adaptive Technologies, Inc., QLogic
Acquisition Corporation and QLogic Corporation (9)
3.1 Restated Certificate of Incorporation of Registrant, as amended (8)
3.2 Restated Bylaws of Registrant (12)
4.1 Option Agreement to purchase up to thirty million shares of common
stock granted to Pacific Technology Services, Inc., dated March 1,
2001 (1)
4.2 Certificate of Designation of Series K Convertible Preferred Stock (2)
4.3 Registration Rights Agreement dated November 20, 2001 issued to Halco
Investments L.C. (2)
4.4 Warrant to purchase common stock issued to H.Irwin Levy, dated May 16,
2001 (4)
4.5 Warrant to purchase common stock issued to H.Irwin Levy, dated May 21,
2001 (4)
4.6 Warrant to purchase common stock issued to H.Irwin Levy, dated May 30,
2001 (4)
4.7 Warrant to purchase common stock issued to H.Irwin Levy, dated June 5,
2001 (4)
4.8 Warrant to purchase common stock issued to The Charlotte Marden 1993
Trust, dated June 7, 2001 (4)
4.9 Form of Warrant, between Registrant and certain private investors (5)
4.10 Form of Subscription Agreement, between Registrant and certain private
investors (5)
4.11 Form of Registration Rights Agreement, between Registrant and certain
private investors (5)
4.12 Warrant to purchase 200,000 shares of common stock issued to H. Irwin
Levy, dated December 29, 2000 (5)
4.13 Warrant to purchase 500,000 shares of common stock issued to H. Irwin
Levy, dated December 29, 2000 (5)
4.14 Subscription Agreement, between Registrant and H. Irwin Levy, dated
December 29, 2000 (5)
4.15 Certificate of Designation of Series G Preferred Stock (5)
4.16 Registration Rights Agreement, between Registrant and H. Irwin Levy,
dated December 29, 2000 (5)
4.17 Warrant to purchase common stock issued to Wishmasters, dated May 9,
2000 (7)
4.18 Warrant to purchase common stock issued to Ladenburg Thalmann, dated
May 9, 2000 (7)
70
4.19 Common Stock Purchase Agreement, between Registrant and Wishmasters,
dated May 4, 2000 (7)
4.20 Registration Rights Agreement, between Registrant and Wishmasters,
dated May 4, 2000 (7)
4.21 Certificate of Designation of Series D Convertible Preferred Stock(10)
4.22 Certificate of Designation of Series E Convertible Preferred Stock(11)
4.23 Certificate of Designation of Series F Convertible Preferred Stock(11)
4.24 Restated Certificate of Incorporation of Registrant - see Exhibit 3.1
4.25 By-Laws of Registrant, as amended - see Exhibit 3.2
10.1 Letter Agreement, dated March 25, 2002, extending the maturity date to
December 15, 2002, of certain notes, which are between nStor
Corporation, Inc. and H. Irwin Levy (1)
10.2 Letter Agreement, dated March 25, 2002, extending the maturity date to
December 15, 2002, of a note that is between nStor Corporation, Inc.
and The Charlotte Marden 1993 Trust (1)
10.3 Promissory Note for $3,100,000, dated November 20, 2001 issued to
Halco Investments L.C. (2)
10.4 Preferred Stock Purchase Agreement, dated November 20, 2001, between
Registrant, Maurice A. Halperin and Halco Investments, L.C. (2)
10.5 10% Subordinated Promissory Note for $150,000, dated August 7, 2001,
between nStor Corporation, Inc. and H. Irwin Levy (3)
10.6 10% Subordinated Promissory Note for $200,000, dated September 25,
2001, between nStor Corporation, Inc. and H. Irwin Levy (3)
10.7 8% Promissory Note for $2,100,000, dated August 14, 2001, between
Registrant and Halco Investments, L.C. (3)
10.8 8% Revolving Credit Note for $1,000,000, dated August 14, 2001,
between Registrant and Halco Investments, L.C. (3)
10.9 8% Promissory Note for $1,275,000, dated September 10, 2001, between
Registrant and Halco Investments, L.C. (3)
10.10 8% Promissory Note for $332,442, dated October 29, 2001, between
Registrant and
Halco Investments, L.C. (3)
10.11 Letter Agreement, dated August 31, 2001, extending the maturity date
to December 31, 2001, of certain notes, which are between nStor
Corporation, Inc. and H. Irwin
Levy (3)
10.12 Letter Agreement, dated August 31, 2001, extending the maturity date
to December 31, 2001, of a note that is between nStor Corporation,
Inc. and The Charlotte Marden 1993 Trust (3)
10.13 Subordinated Promissory Note for $100,000, dated May 16, 2001,
between nStor Corporation, Inc. and H. Irwin Levy (4)
10.14 Subordinated Promissory Note for $250,000, dated May 21, 2001,
between nStor Corporation, Inc. and H. Irwin Levy (4)
10.15 Subordinated Promissory Note for $375,000, dated May 30, 2001,
between nStor Corporation, Inc. and H. Irwin Levy (4)
10.16 Subordinated Promissory Note for $75,000, dated June 5, 2001, between
nStor Corporation, Inc. and H. Irwin Levy (4)
10.17 Subordinated Promissory Note for $450,000, dated June 7, 2001,
between nStor Corporation, Inc. and The Charlotte Marden 1993 Trust
(4)
10.18 Subordinated Promissory Note for $300,000, dated July 12, 2001,
between nStor Corporation, Inc. and H. Irwin Levy (4)
10.19 Letter Agreement, dated June 29, 2001, extending the maturity date to
August 31, 2001, of certain notes, which are between nStor
Corporation, Inc. and H. Irwin Levy (4)
10.20 Letter Agreement, dated June 29, 2001, extending the maturity date to
August 31, 2001, of a note, that is between nStor Corporation, Inc.
and The Charlotte Marden 1993 Trust (4)
10.21 Form of 8% Convertible Subordinated Promissory Note, between
Registrant and certain private investors (5)
10.22 Promissory Note for $1,050,000, dated November 15, 2000, between
Registrant and MLL Corp. (5)
10.23 Promissory Note for $500,000, dated November 20, 2000, between
Registrant and Patrice Auld (5)
10.24 Promissory Note for $650,000, dated December 29, 2000, between
Registrant and H. Irwin Levy (5)
10.25 Promissory Note for $600,000, dated January 16, 2001, between
Registrant and H. Irwin Levy (5)
10.26 Promissory Note for $125,000, dated January 17, 2001, between
Registrant and Larry
Hemmerich (5)
10.27 Assumption and Amendment Agreement, dated September 14, 2000, between
Registrant and Wells Fargo Credit, Inc. (6)
10.28 Third Amended and Restated Line of Credit Note, dated September 14,
2000, between Registrant and Wells Fargo Credit, Inc. (6)
10.29 Continuing Guaranty between Registrant and Wells Fargo Credit, Inc.
(6)
10.30 Promissory Note for $2,500,000, dated July 31, 2000, between
Registrant and H. Irwin Levy (6)
10.31 Promissory Note for $2,550,000, dated October 11, 2000, between
Registrant and H. Irwin Levy (6)
10.32 Promissory Note for $750,000, dated October 11, 2000, between
Registrant and MLL Corp. (6)
10.33 Escrow Agreement, dated May 4, 2000, among Registrant, Wishmasters
and Epstein, Becker & Green, P.C. (7)
72
10.34 1996 Stock Option Plan, dated October 5, 1996 (13)
10.35 Software License Agreement, dated January 10, 2000, by and among
nStor Corporation, Inc. and QLogic Acquisition Corporation (10)
10.36 Amendment to Registrant's 1996 Stock Option Plan (14)
11.01 Statement Regarding Computation of Per Share Earnings for the Year
Ended December 31, 2001 (1)
21 Subsidiaries of Registrant (1)
23.1 Consent of Independent Accountants dated April 8, 2002, signed by
Swenson Advisors, LLP (1)
23.2 Consent of Independent Certified Public Accountants dated April 5,
2002, signed by BDO Seidman, LLP (1)
- --------------
1) Filed herewith.
2) Incorporated by reference to Exhibits previously filed as Exhibits to
Registrant's Form 8-K dated November 20, 2001 and filed November 28,2001.
3) Incorporated by reference to Exhibits previously filed as Exhibits to
Registrant's Form 10-Q for the quarter ended September 30, 2001, filed
November 9, 2001.
4) Incorporated by reference to Exhibits previously filed as Exhibits to
Registrant's Form 10-Q for the quarter ended June 30, 2001, filed August 17,
2001.
5) Incorporated by reference to Exhibits previously filed as Exhibits to
Registrant's Form 10-K for year ended December 31, 2000, filed April 17,
2001.
6) 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.
7) Incorporated by reference to Exhibits previously filed as Exhibits to
Registrant's Form S-3 Registration Statement, filed June 7, 2000.
8) Incorporated by reference to Exhibits previously filed as Exhibits to
Registrant's Form S-3 Registration Statement, filed January 9, 2000.
9) Incorporated by reference to Exhibits previously filed as Exhibits to
Registrant's Form 8-K dated and filed January 14, 2000.
10) 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.
11) Incorporated by reference to Exhibits previously filed as Exhibits to
Registrant's Form 8-K dated June 8, 1999, filed June 23, 1999.
12) 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.
13) Incorporated by reference to Exhibits previously filed as Exhibits to
Registrant's Form 10-K for the year ended December 31, 1999, filed April 14,
2000.
73
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/ Thomas Gruber
April 5, 2002 By:_____________________________________
Thomas Gruber, Acting President,
Chief Operating and Financial 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/ Maurice A. Halperin
April 5, 2002 _____________________________________________
Maurice A. Halperin, Chairman of the Board
/s/ H. Irwin Levy
April 5, 2002 _____________________________________________
H. Irwin Levy, Vice Chairman of the Board and
Chief Executive Officer
/s/ Roger H. Felberbaum
April 5, 2002 _____________________________________________
Roger H. Felberbaum, Director
/s/ Bernard Green
April 5, 2002 _____________________________________________
Bernard Green, Director
/s/ Jack Jaiven
April 5, 2002 _____________________________________________
Jack Jaiven, Vice President and Treasurer
/s/ Michael L. Wise
April 5, 2002 _____________________________________________
Michael L. Wise, Director