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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
---------------
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 October 31, 1996
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.
(Formerly IMGE, Inc.)
(exact name of registrant as specified in its charter)
Delaware 95-2094565
(State of Incorporation) (I.R.S. Employer ID No.)
100 Century Blvd., West Palm Beach, Florida 33417
(Address of principal executive offices)
Registrant's telephone number, including area code: 561-640-3131
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
(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
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. [X]
AGGREGATE MARKET VALUE OF THE VOTING STOCK
HELD BY NONAFFILIATES OF THE REGISTRANT
Common Stock, par value $.05 per share ("Common Stock"), was the
only class of voting stock of the Registrant outstanding on October
31, 1996. Based on the last sales price of the Common Stock on the
Over-the-Counter ("OTC") Market on December 31, 1996 (2-5/8), the
aggregate market value of the approximately 12,252,000 shares of
the Common Stock held by persons other than officers, directors and
persons known to the Registrant to be the beneficial owners (as
that term is defined under the rules of the Securities and Exchange
Commission) of more than five percent of the Common Stock on that
date was approximately $32.2 million. By the foregoing
statements, the Registrant does not intend to imply that any of
these officers, directors or beneficial owners are affiliates of
the Registrant or that the aggregate market value, as computed
pursuant to rules of the Securities and Exchange Commission, is in
any way indicative of the amount which could be obtained for such
shares of Common Stock.
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the Registrant has filed all
documents and reports required to be filed by Section 12, 13, or
14(d) of the Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a court.
Yes ____ No ____
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
Indicate the number of shares outstanding of each of the
Registrant's classes of common stock, as of the latest practicable
date:
18,670,477 shares of Common Stock, par value $.05
per share, were outstanding as of December 31, 1996.
DOCUMENTS INCORPORATED BY REFERENCE
Definitive Proxy Statement of nStor Technologies, Inc.
for the 1997 Annual Meeting of Stockholders
(incorporated in Part III)
PART I
Item 1. Business
General
nStor Technologies, Inc. (formerly IMGE, Inc. - the "Company"),
through its operating subsidiary, nStor Corporation, Inc.
("nStor"), has been engaged in the development, manufacture and
marketing of a full range of computer disk array products, known as
RAID (Redundant Array of Independent Disks) subsystems (the "RAID
Business") since June 3, 1996, the effective date of nStor's
acquisition of the RAID Business (the "nStor Acquisition").
nStor's RAID subsystems provide users with high capacity, fault-tolerant
storage, allow uninterrupted access to data and support a
variety of operating systems, including Novell NetWare, Microsoft
NT Server, SCO UNIX, IBM OS/2 LAN Server, and IBM OS/2 WARP. The
RAID subsystems provide data storage solutions, particularly for
applications requiring substantial storage capacity, such as
document imaging, video and multimedia, or transaction-intensive
environments, such as banking and order entry systems. nStor's
products are sold through a network of original equipment
manufacturers ("OEM's") and distributors located worldwide.
nStor acquired the RAID Business from a subsidiary of Seagate
Technologies, Inc. ("Seagate"), effective June 3, 1996, for
$592,000 in cash, including acquisition costs, and agreed to pay a
royalty to Seagate, estimated at $800,000, based upon 5% of nStor's
sales of certain products during the 15 month period beginning
October 1, 1996.
Prior to the nStor Acquisition, the Company's only assets were
securities issued by IMNET Systems, Inc. ("IMNET"), which the
Company had acquired in October 1992 in exchange for substantially
all of the Company's operating assets. During the time in which
the Company owned the IMNET securities, the Company's only
activities consisted of monitoring its investment in IMNET and
evaluating potential business opportunities. During 1996, the
Company sold the IMNET securities and recognized a gain of
$11,955,000.
The Company maintains its executive offices at 100 Century
Boulevard, West Palm Beach, Florida 33417 and its telephone number
is (561) 640-3131. The Company's nStor operating subsidiary is
located in Lake Mary, Florida (in the Orlando area). Information
regarding the Company can be accessed through the World Wide Web at
http:// www.nstor.com.
RECENT DEVELOPMENT - ACQUISITION OF ASSETS OF PARITY SYSTEMS, INC.
("PARITY")
Effective December 1, 1996, nStor acquired substantially all the
assets and assumed certain liabilities of Parity (the "Parity
Acquisition"), a privately-owned company, headquartered in Los
Gatos, California. Parity was engaged in the design, manufacture
and sale of computer storage subsystems, memory devices and
peripheral equipment, and the integration of storage management
solutions, digital media management, and client/server systems for
RISC-based UNIX and Windows NT Server environments. The Parity
Acquisition will enable nStor to gain access to the rapidly-expanding
mid-range UNIX market and expands nStor's product line to
include high-performance storage and data protection/management
solutions, backup/data recovery solutions, hierarchial storage
management, visual asset management systems and compact disc
recorder technology.
The purchase price for Parity's assets consisted of approximately
$5.8 million in cash, including approximately $3 million in the
form of the repayment of the outstanding balance of Parity's bank
line of credit, and a warrant (exercisable at any time during the
three years following the date of the Parity Acquisition) to
purchase 500,000 shares of the Company's Common Stock at $2.10 per
share, the market price for the Company's Common Stock on October
17, 1996, the date of execution of the Letter of Intent regarding
the Parity acquisition. The purchase price included $300,000 to be
held in escrow for up to three years in connection with certain
indemnifications made by Parity.
The Parity Acquisition will be accounted for under the purchase
method of accounting. Allocation of the purchase price will be
determined in 1997. The Company's preliminary estimate indicates
that the fair value of the net assets acquired as of the date of
acquisition is approximately $3.5 million, consisting of
approximately $9.7 million of assets (principally accounts
receivable, inventories and intellectual assets), less
approximately $6.2 million of liabilities, including the
aforementioned bank line of credit subsequently repaid.
RAID TECHNOLOGY
RAID, a concept developed in 1988 by a team of researchers from the
University of California at Berkeley, is an emerging storage
technology consisting of two or more disk drives working together
as one, using proprietary hardware, firmware and software to
achieve extremely fast data transfer rates, high levels of
redundancy and large storage capacity. The key characteristics of
RAID subsystems' performance are as follows:
Data Transfer Rate. RAID subsystems are able to achieve much
faster data transfer rates than individual disk drives because of
their ability to spread data among all of the component disk drives
and retrieve the data from all drives simultaneously at very fast
speeds. nStor's RAID subsystems can achieve data transfer rates of
up to 40 million bytes of data per second.
Redundancy. Redundancy refers to the replication of certain
data within the RAID subsystem so that if one disk drive or other
redundant component, such as a power supply, fails within the disk
array, no data is lost and the application continues uninterrupted.
In the event of such a failure, the failed component can be "hot-swapped"
for a new component (exchanged without necessitating taking down
the system).
Storage Capacity. By linking together multiple disk drives,
RAID subsystems achieve very large storage capacities. nStor's
disk arrays are able to store up to several hundred terabytes of
data.
Multiple levels of RAID have been defined by the research team from
Berkeley, which levels have been endorsed by The RAID Advisory
Board. The levels are differentiated by the manner in which they
write data to the disks. Below is a brief explanation of those
levels utilized by the nStor product line:
Level Technology Benefits Applications
RAID O Disk striping - Parallel disk input/ Those requiring high
data is written output ("I/O") for performance, but no
across multiple fast performance, fault-tolerance, video
disk drives. maximized storage editing, temporary
capacity, low up- data base scratch
front cost. areas.
RAID 1 Disk mirroring - Complete data re- Small servers ( 8GB),
duplicate data dundancy, easy to systems requiring
is written to implement, fast maximum performance
two separate read/write with fault-tolerance.
drives. performance.
RAID 3 Striping & parity - Enhanced performance Optimal for applications
data is striped for single user, in which large blocks of
across drives and sequential file sequential data must be
parity is main- systems. transferred quickly,
tained on a dedi- such as real-time audio/
cated parity drive. video, document imaging.
RAID 5 Disk striping Fault tolerance, Multi-user, OLTP, LAN
of both data efficient storage, servers 8GB requiring
and parity data excellent perfor- fault-tolerance.
across multiple mance in transac-
disks. tion processing
environments.
RAID 10 Combination of Fast performance Those that can justify
RAID O and 1 - and complete 100% redundancy of
data is striped redundancy. mirrored arrays and
across disks as the needs of the
in RAID O and enhanced I/O perform-
each disk has a ance of striped
mirror disk as in arrays.
RAID 1.
RAID 50 Combination of Fast performance. Those requiring highly
RAID O and 5. reliable storage, high
request rates, and high
data transfer
performance.
Connor Storage Systems Group, which owned nStor's RAID Business
prior to Seagate, co-developed (with Intel Corp.) the SAF-TE (SCSI
Accessed Fault-Tolerant Enclosures) specification. SAF-TE is an
industry-wide standard means of status reporting and control for
storage subsystems which facilitates local and remote automated
alert notification particularly for customers using high volume
servers. SAF-TE facilitates integration by system manufacturers of
servers, peripheral packaging and controllers by providing an open,
low-cost non-proprietary specification for communicating with
fault-tolerant enclosures. The SAF-TE specification allows system
administrators to monitor the status of all vital components of the
entire computer memory subsystem, including the disk drives, power
supplies and cooling fans, in contrast to many other RAID
subsystems which only report disk drive failures.
Other technology innovations in nStor's product line include:
Single Connector Attach (SCA) drives, first introduced in early
1994, used by such industry leaders as Intel, IBM and AT&T as the
in-server standard; Client-Server GUI (Graphical User Interface)
RAID Alert Management software used in Windows NT and NetWare
environments, providing management, monitoring and control features
in a point and click format; SMART enclosure technology,
incorporating an intelligent backplane (a circuit board attachment
between disk drives and the controller rather than a cable
attachment) to support hot swap disk drives and cooling fans,
facilitating the process by which local area network (LAN)
administrators manage fault-tolerant storage; and, ULTRA SCSI which
provides for a faster rate of data flow between the server and RAID
subsystem.
INDUSTRY
The rapid expansion and advancement of computer system technology
and the growing reliance upon "networks", including LAN's,
intranets, and the Internet, has created a necessity for much
greater amounts of secure data storage support and "redundancy"
(see below Item 1. Business - RAID Technology). Users of computer
systems in business and government environments are increasingly
demanding continuous data flows and uninterrupted access to
critical information. Such demands are especially important in
banking and other industries that through on-line computer access,
make these services and products available to customers on a full-time basis.
As businesses increase their use of client server
systems, data storage requirements on both networks and specialized
workstations are growing dramatically, and there is almost no
tolerance for system downtime.
RAID technology has evolved into an effective tool to protect
network computer users from the loss of critical data. Management
believes that RAID subsystems will continue to play a significant
role as the preferred vehicles for data storage in network
environments. Management also believes that nStor is well-positioned
to provide fault-tolerant information storage systems to
all segments of the market and will be able to participate in the
forecasted growth in the information storage market. However,
there can be no assurance that the Company will be successful in
these efforts due to the possibility of increased competition and
the advancement of alternative technologies.
PRODUCTS
Listed below is a summary of the family of nStor disk array
products.
Product Description and Features
CR 2 Series Stackable dual bay system with single enclosure
capacity containing two or four gigabyte (GB) disk
drives (up to 8 GB's of storage per enclosure).
Single system may be configured for mirroring or
duplexing. Systems may be daisy-chained and
configured for RAID 5 applications.
CR 6 Series 6-bay small footprint desktop system, containing 1, 2
or 4 GB disk drives (up to 24 GB's of storage per
enclosure). May be configured for RAID levels O, 1,
3 or 5. Hot-swappable disk drives, power supplies and
cooling fans. Data transfer rates of up to 20 MB's
per second.
CR 6e Series 6-bay, small footprint SAF-TE compliant desktop
subsystem, containing 2 or 4 GB disk drives (up to 24
GB's of storage per enclosure). May be configured for
RAID levels 0, 1, 3 or 5. Hot-swappable disk drives,
power supplies and cooling fans, on-the-fly disk
capacity expansion and RAID level migration. Data
transfer rates of up to 20 MB's per second.
CR 8 Series 8-bay rack-mountable or deskside tower enclosure
containing 1, 2, 4 or 9 disk drives (up to 72 GB's of
storage per enclosure). May be configured for RAID
levels 0, 1, 3 or 5. Hot-swappable disk drives, power
supplies and cooling fans. Data transfer rates of up
to 20 MB's per second.
CR 8e Series 8-bay rack-mountable or deskside tower SAF-TE
compliant subsystem containing 4 or 9 GB disk drives
(up to 72 GB's of storage per enclosure). May be
configured for RAID levels 0, 1, 3, 5, 10 or 50.
Hot-swappable disk drives, power supplies and cooling
fans, on-the-fly disk capacity expansion and RAID
level migration. Supports Ultra/Wide SCSI-3 with data
transfer rates of up to 40 MB's per second.
CR 12 Series 12-bay deskside tower subsystem containing 2 or 4 GB
disk drives (48 GB's of storage per enclosure). May
be configured for RAID levels 0, 1 and 5. Hot-swappable
disk drives, power supplies and cooling fans.
Supports data transfer rates of up to 20 MB's per second.
PRODUCT DISTRIBUTION AND CUSTOMERS
nStor distributes its products primarily through two sales channels
represented by OEM's and a world-wide network of independent
wholesale distributors. One customer represented approximately 53%
of total sales reported for fiscal 1996. The nStor customer base
ranges from small businesses to Fortune 500 firms and government
organizations. To strengthen its international presence and sales
efforts, nStor has recently opened a sales office in the United
Kingdom, and plans to continue to broaden its international
distribution base to effectively penetrate emerging markets in
Europe, Asia and Latin America. nStor also maintains a sales office
in Costa Mesa, California.
OEM's. nStor markets its products to OEMs, who in turn
generally incorporate those products into their own computer systems
and finished products. Sales to OEMs accounted for 74% of nStor's
sales for the five months ended October 31, 1996.
Wholesale Distributors. nStor also markets its products
through a network of regional, national and international wholesale
distributors. Generally, distributors sell these products to value-added
resellers (VARs) and smaller system integrators, who in turn
sell their products to end users. Sales to distributors accounted
for 26% of nStor's sales for the five months ended October 31, 1996.
nStor has purchasing and marketing agreements with its major OEM's
and wholesale distributors. These agreements typically contain
provisions relating to stock rotation privileges and price
protection. As is typical in the computer industry, nStor works
with OEM's and wholesale distributors to monitor inventory levels
which results in returns of unsold products on a limited basis in
exchange for other products on terms previously negotiated. In
addition, in the event nStor reduces its prices, credits are issued
for the difference between the purchase price of products remaining
in their inventory and the reduced price for such products on terms
previously negotiated. nStor has established reserves for product
returns, price protection and warranty claims which management
believes are adequate and are consistent with general industry
practices. However, there can be no assurance that product returns,
price protection or warranty claims will not have a material adverse
effect on nStor's future results of operation.
SALES AND MARKETING
Sales. nStor sells its products primarily through its direct
sales force which consisted of seven employees at October 31, 1996,
one of whom is located in the United Kingdom. The direct sales
organization recruits new distributors, supports existing nStor
distributors, markets products to OEMs and system integrators and
participates in trade shows.
Marketing. nStor utilizes a variety of programs to market its
products including direct mailings, advertisements in industry trade
publications, product brochures, joint marketing development fund
advertising, and participation in regional, national and
international trade shows.
TECHNICAL SUPPORT AND CUSTOMER SERVICE
nStor believes that its ability to provide prompt and reliable
technical support has significantly enhanced its marketing efforts.
A toll-free telephone number is provided for support to all OEM's,
wholesale distributors and end users. nStor employs an engineering
and support staff (about 16 people as of October 31, 1996) all of
whom have extensive training and strive to work with all levels of
distribution and end users in order to satisfy its customers.
In addition, nStor provides all customers with a limited three year
warranty which permits customers to return for repair or replacement
all enclosures not operating as warranted. Disk drives are warranted
for five years through the manufacturer. Thus far, nStor has not
experienced material warranty claims; however, there can be no
assurance that warranty claims will not have a material adverse
effect on future operating results.
MANUFACTURING AND SUPPLIERS
nStor typically assembles its products from components and
prefabricated parts, such as controllers, cabinets, multiple disk
drives and power supplies, manufactured and supplied by others. The
Company has established strategic relationships with certain of its
suppliers to manage inventory in such a manner that the Company is
better able to fulfill changing customer needs. nStor has an OEM
relationship with Seagate, which it believes is a reliable source of
disk drives, and a license agreement with Intel, which allows
incorporation of the SAF-TE specification into nStor's products (see
Item 1. Business - RAID Technology). The license agreement has no
specific term and does not require any specific payments. nStor
believes that the INTEL/SAF-TE relationship enhances its ability to
market its product line. nStor believes that there are a sufficient
number of suppliers available to meet its manufacturing needs.
The sophisticated nature of the Company's products requires extensive
testing by skilled personnel. The Company utilizes specialized
testing equipment and maintains an internal test engineering group of
about 3 people to provide this product support.
BACKLOG
nStor manufactures its products based on its forecast of near-term
demand and maintains inventory in advance of receipt of firm orders
from customers. Shipments are generally made shortly after receipt
of a firm order. Customers may reschedule orders with little or no
penalty. As a result, nStor's backlog at any given time is not
necessarily indicative of future sales levels.
RESEARCH AND DEVELOPMENT
The Company operates in an industry which is subject to rapid
technological change. Its ability to compete successfully is largely
dependent upon the timely development and introduction of products
and its ability to anticipate and respond to change. The Company
uses engineering design teams that work with marketing managers,
application engineers and customers to develop products and product
enhancements. Computer input/output 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 the Company's disk arrays. As part
of its development strategy, the Company actively seeks available,
cooperative and co-development activities with industry leaders in
the hardware, software and systems businesses.
Research and development expenses during the five months ended
October 31, 1996 amounted to $701,000. All of the Company's research
and development expenditures are expensed as incurred. As of October
31, 1996, the Company had 17 full-time employees engaged in research
and development.
COMPETITION
The market for all levels of RAID subsystems is subject to intense
competition. nStor competes not only with other disk array
manufacturers, but also with manufacturers of proprietary, integrated
computer systems and system integrators which sell computer systems
containing general purpose RAID subsystems, some of which may have
significantly greater financial and technological resources or larger
distribution capabilities than nStor. Such competitors may offer
their products at lower sales prices than nStor; accordingly, nStor
must often compete on the basis of product quality, performance and
reliability in specific applications. nStor's continued ability to
compete will largely depend upon its ability to continue to develop
high performance products at competitive prices while continuing to
provide superior technical support and customer service.
EMPLOYEES
As of October 31, 1996, nStor employed 50 full-time employees, of
which 17 were involved in engineering, product development and
technical support, 13 in sales and marketing, 11 in manufacturing
and operations, and 9 in finance, management and administration. As
a result of the Parity Acquisition, as of December 31, 1996, nStor
employed approximately 84 full-time employees. nStor's employees are
not covered by a collective bargaining agreement, there have been no
work stopages and nStor believes its employee relations are good.
Management believes that the future success of nStor will largely
depend upon its ability to continue to attract, employ and retain
competent qualified technical, marketing and management personnel.
Experienced personnel are in great demand and nStor must compete with
other technology firms, some of which may offer more favorable
economic incentives to attract qualified personnel.
CERTAIN TRANSACTIONS AND RELATIONSHIPS
Hilcoast Advisory Services, Inc. ("Advisor")
Since July 1, 1996, Advisor has provided certain financial consulting
and administrative services to the Company under a one-year agreement
which provides for the payment of $6,000 per month, plus
reimbursement for all out-of-pocket expenses, and which may be
terminated by the Company upon 60 days notice and by Advisor upon 180
days notice. H. Irwin Levy, a director and principal shareholder of
the Company, is the Chairman of the Board, Chief Executive Officer
and a principal shareholder of the parent of Advisor. Management
believes that the terms of this agreement are no less favorable to
the Company than those that would be received from other sources.
Intelligent Manufacturing Systems, Inc. ("IMS")
R. Daniel Smith, a director of the Company, is also the Chief
Executive Officer and sole shareholder of IMS, which specializes in
providing software solutions. In July 1996, nStor purchased an
integrated software package from IMS, including installation,
consulting and training support, at a cost of approximately $172,000.
The software package was purchased to facilitate the internal
operations of nStor and includes finance, planning and production,
sales and marketing, service and engineering modules. Management
believes that the terms of this transaction were no less favorable to
nStor than those that would be paid to other vendors.
Item 2. Properties
nStor leases 100% of an approximately 22,000 square foot building in
Lake Mary, Florida, under a lease which expires in April 2000, at a
present annual base rent of approximately $152,000. This facility
accommodates all current operations of nStor including administration
and management, engineering, product development, manufacturing,
technical support and sales and marketing.
nStor also leases office suites in Costa Mesa, California, and
Bedford, England, under leases which expire in 1997. The Company's
executive offices consist of a minor amount of space located at 100
Century Blvd., West Palm Beach, Florida.
As a result of the Parity Acquisition, nStor has been negotiating to
lease approximately 18,000 square feet of additional manufacturing
space in Lake Mary to meet anticipated occupancy requirements. The
Company believes that its existing facilities and additional
available facilities will be adequate to meet future needs.
Item 3. Legal Proceedings
In June and August 1996, the Company, two of its directors and nStor
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
nStor (see Note 2 to Consolidated Financial Statements). The
plaintiffs seek compensatory damages, punitive damages, and equitable
relief for alleged interference with the plaintiffs' alleged rights.
Both cases are in preliminary stages; however, the Company is unaware
of any facts that would support any of the plaintiff's claims and,
accordingly, the Company believes that the claims are without merit.
From time to time, the Company is subject to legal proceedings and
other claims arising in the ordinary course of business. In the
opinion of management, the Company is not a party to any litigation
the outcome of which would have a material adverse effect on its
business or operations.
Item 4. Submission of Matters to a Vote of Security Holders
The Company did not submit any matters to the vote of its security
holders during the fourth quarter of its 1996 fiscal year. However,
on October 29, 1996, the Board of Directors of the Company voted
unanimously to change the name of the Company from IMGE, Inc. to
nStor Technologies, Inc. The name change was approved by the written
action of the holders of 9,437,261 shares (53%) of the Company's then
outstanding shares of common stock. On November 21, 1996, a notice
of the name change by written consent was sent to all of the
Company's shareholders. On November 7, 1996, the Company filed a
Certificate of Amendment to its Restated Certificate of Incorporation
with the Secretary of State of the State of Delaware to effectuate
the name change.
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters
The Company's Common Stock is traded on the over-the-counter ("OTC")
market under the symbol NSTT. The following table sets forth the
market price range of the Common Stock for each quarter during the
years ended October 31, 1996 and 1995, based on the high and low
closing sales prices as reported by the National Association of
Securities Dealers' Automated Quotation System. Such prices
reflect interdealer prices without retail markup, markdown or
commission and may not necessarily represent actual transactions.
The Company has not paid any dividends and does not expect to pay any
dividends in the near future. No assurance can be given that the
Company will pay any dividends on its Common Stock.
Market Price Range
--------------------
1996 High Low
---- -------- --------
First quarter 7/8 3/8
Second quarter 3/4 3/8
Third quarter 1-13/16 11/16
Fourth quarter 2-11/16 1
1995
----
First quarter 1/8 1/32
Second quarter 5/32 1/32
Third quarter 25/64 3/32
Fourth quarter 3/4 7/32
As of December 31, 1996, the Company had 18,670,477 shares of Common
Stock outstanding and approximately 2,200 holders of record of such
stock.
Item 6. Selected Financial Data
(dollars in thousands, except per share data)
The following table summarizes certain selected consolidated
financial data for the Company for each of the years in the five-year
period ended October 31, 1996. Certain amounts for years prior to
fiscal 1996 have been reclassified to conform to the 1996
presentation. The selected financial data has been derived from the
Company's 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 October 31,
-------------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- --------
Statement of Operations:
Net sales $ 5,619 $ - $ - $ - $ -
Cost of sales 3,547 - - - -
------- ------- ------- ------- -------
Gross profit 2,072 - - - -
Operating expenses (1,957) - - - -
------- ------- ------- ------- -------
Income from operations 115 - - - -
Other, net 12,117(1) (61) (71) (894) (159)
------- ------- ------- ------- -------
Income (loss) from con-
tinuing operations
before extraordinary
gains 12,232 (61) (71) (894) (159)
Extraordinary gains 566 - 343 92 -
Loss from discontinued
operations - - - - (3,537)
------- ------- ------- ------- -------
Net income (loss) $12,798 ($ 61) $ 272 ($ 802) ($ 3,696)
======= ======= ======= ======= =======
Per common stock:
Income (loss) from
continuing opera-
tions before extra-
ordinary gains $ .70 ($ .00) ($ .00) ($ .05) ($ .01)
Extraordinary gains .03 - .02 - -
Loss from discontinued
operations - - - - (.20)
------- ------- ------- ------- -------
Net income (loss) $ .73 ($ .00) $ .02 ($ .05) ($ .21)
======= ======= ======= ======= =======
Average number of common
shares outstanding 17,606,477 17,600,477 17,600,477 17,600,477 17,531,292
========= ========== ========== ========== ==========
Balance Sheet Data:
Working capital $11,045 $11,408 ($ 586) ($ 567) ($ 644)
======= ======= ======= ======= =======
Total assets $15,677 $12,054 $ 26 $ 37 $ 488
======= ======= ======= ======= =======
Long-term debt $ 510 $ 476 $ 444 $ 735 $ 386
======= ======= ======= ======= =======
Stockholders' equity
(deficit) $12,390 $10,932 ($ 1,030) ($ 1,302) ($ 542)
======= ======= ======= ======= =======
- ----------
(1) Principally consists of $11,955 gain from the sale of IMNET stock
(see Note 3 to Consolidated Financial Statements).
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Overview
Operating results for fiscal 1996 include the operations of nStor
from June 3, 1996, the effective date of the nStor Acquisition (see
Note 2 to Consolidated Financial Statements). As a result of the
acquisition, nStor develops, manufactures and markets a full range of
computer disk array products, known as RAID (Redundant Array of
Independent Disks) subsystems, which provide users with high
capacity, fault-tolerant storage and uninterrupted access to data.
Allocations have been made to reflect the estimated fair values of
the net assets acquired resulting in asset bases which differ from
those of the previous owner. In addition, certain of nStor's
operating policies and accounting procedures are different from those
of the previous owner. Accordingly, comparative financial data of
nStor's business for periods prior to June 3, 1996 are not presented
in this section since they would be neither comparable nor
informative.
From the date the Company disposed of substantially all of its
operating assets in October 1992 in exchange for shares in IMNET (see
Note 3 to Consolidated Financial Statements) until the nStor
Acquisition in June 1996, the Company's only activities consisted of
monitoring its investment in IMNET and evaluating potential business
opportunities. Accordingly, operating results for fiscal 1995
consist of administrative and interest expense, partially offset by
financial support which IMNET had agreed to provide for minimal
operational costs and essential activities of the Company. This
financial support ceased in January 1996, when the Company was able
to sell its shares in IMNET.
Results of Operations
1996 Compared to 1995
The Company reported net income of $12,798,000 for the year ended
October 31, 1996 as compared to a net loss of $61,000 for the year
ended October 31, 1995.
Results of operations for fiscal 1996 included a gain of $11,955,000
resulting from the disposition of 100% of the Company's investment in
IMNET (see Note 3 to Consolidated Financial Statements) and an
extraordinary gain of $566,000 on extinguishment of debt (see Note 7
to Consolidated Financial Statements).
Sales
During its initial five months of operations, nStor's net sales
amounted to $5,619,000 generated through a network of OEM's and
wholesale distributors located worldwide. Future sales are expected
to increase significantly principally due to the Parity Acquisition,
effective December 1, 1996 (see Note 11 to Consolidated Financial
Statements), nStor's recent introduction of new RAID products, and
the completion of agreements with several new OEM's. Sales are also
expected to be positively affected as nStor's product line is made
available to Parity's customer base. For the twelve month period
prior to the Parity Acquisition, Parity's sales were approximately
$28.5 million. The foregoing statements regarding increases in
nStor's future sales are forward looking statements that may prove
not to be accurate. Factors that could cause such statements not to
be accurate include, but are not limited to, increased competition
for nStor's products, improvements in alternative technologies, a
lack of market acceptance for new products introduced by nStor and
the failure of nStor to successfully market its products.
Cost of Sales/Gross Margin
Gross margins for fiscal 1996 amounted to 37%. nStor's gross margins
are dependent, in part, on product mix which is anticipated to
fluctuate from time to time. nStor has been able to increase its
gross margins over those achieved by its predecessor due to a greater
emphasis on selling higher margin enhanced storage devices and
certain cost efficiencies. Although nStor expects to achieve higher
gross margins in the future on sales of products related to the nStor
Acquisition, gross margins on product sales associated with the
Parity Acquisition are not anticipated to reach that level during the
transition period. However, nStor expects to be able to gradually
increase gross margins on the Parity product line during 1997 as
operating efficiencies are realized and nStor's component servicing
capabilities allow the Parity product line to be manufactured at a
lower cost. The foregoing statements regarding increases in
nStor's future gross margins are forward looking statements that may
prove not to be accurate. Factors that could cause such statements
not to be accurate include, but are not limited to, increases in the
cost of components or raw materials used in nStor's products,
increased labor costs, higher production costs for new products
developed by nStor, decreases in the price of nStor's products, and
a shift in product sales to less profitable products.
Operating Expenses
nStor's operating expenses for its initial five months ended October
31, 1996 amounted to $1,957,000, consisting of $701,000 in research,
development and other engineering costs and $1,256,000 in selling,
general and administrative expenses. Operating expenses are expected
to increase in the future due to the Parity Acquisition and as nStor
continues to focus on improvements and innovations to its existing
product lines and expansion of its customer base. However, nStor
expects to realize certain operating efficiencies in light of the
Parity Acquisition through elimination of duplicate activities and
locations. The foregoing statements regarding achieving operating
efficiencies in nStor's future operating expenses are forward looking
statements that may prove not to be accurate. Factors that could
cause such statements not to be accurate include, but are not limited
to, difficulty in reducing or reallocating nStor's work force, an
inability to consolidate nStor's physical plants and production
capabilities, and delays in the integration of nStor's operational
and sales efforts following the Parity Acquisition.
Other, net
Other, net principally consists of interest income, net of investment
expenses, and amounted to $234,000 in fiscal 1996 as compared to
$9,000 for the preceding fiscal year. This increase was attributable
to interest income earned on the net proceeds received from the sale
of the Company's investment in IMNET.
Income Taxes
Income tax expense was not provided on the Company's pre-tax income
during fiscal 1996 due to utilization of net operating loss
carryforwards. (See Note 5 to Consolidated Financial Statements).
1995 Compared to 1994
The Company reported a net loss of $61,000 for the year ended October
31, 1995 as compared to net income of $272,000 for the year ended
October 31, 1994. During both years, the Company's only activities
consisted of monitoring its investment in IMNET and exploring
potential business opportunities.
Fiscal 1994 results included an extraordinary gain of $343,000
resulting from the Company's extinguishment of debt.
Liquidity and Capital Resources
Net cash used by operating activities increased to $441,000 during
the year ended October 31, 1996, as compared to $11,000 in the
preceding year, principally attributable to increases in accounts
receivable ($1,731,000) and inventory ($391,000) subsequent to the
nStor Acquisition partially offset by higher accounts payable and
other liabilities ($1,574,000). nStor did not acquire accounts
receivable nor assume accounts payable as a result of the nStor
Acquisition. Net cash provided by investing activities amounted to
$11,049,000 during 1996, primarily as a result of $11,955,000 of net
proceeds received on the sale of IMNET, less $592,000 paid in
connection with the nStor Acquisition.
Since the nStor Acquisition, nStor's working capital needs have been
funded by cash flow from operations and the Company's cash balances.
At October 31, 1996, the Company's cash and cash equivalents amounted
to $10,608,000 of which $7,352,000 was invested in high quality
short-term corporate securities. Effective December 1, 1996, nStor
completed the Parity Acquisition and paid approximately $5.8 million
in cash, including approximately $3 million to repay the outstanding
balance of Parity's bank line of credit. nStor is presently
negotiating for an asset based bank line of credit to finance its
expanding working capital needs and maintain a high level of
liquidity. Management believes that nStor's cash flow generated from
operations and the Company's cash balances will be sufficient to
satisfy nStor's working capital and capital expenditure needs for at
least the next twelve months as currently planned.
Effect of Inflation
Inflation has not had any impact on nStor's operations and the
Company does not expect that it will have any material impact in
1997.
Forward Looking Information: Certain Cautionary Statements
Certain statements contained in "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and elsewhere in
this Form 10-K, that are not related to historical results, are
forward looking statements. Actual results may differ materially from
those projected or implied in the forward looking statements.
Further, certain forward looking statements are based upon
assumptions of future events which may not prove to be accurate.
These forward looking statements involve risks and uncertainties
including but not limited to nStor's future cash flows, sales, gross
margins and operating costs, the effect of conditions in the
technology industry and the economy in general, legal proceedings, as
well as certain other risks. Subsequent written and oral forward
looking statements attributable to the Company or persons acting on
its behalf are expressly qualified in their entirety by cautionary
statements in this paragraph and elsewhere described in this Form 10-K
and in other reports filed by the Company with the Securities and
Exchange Commission.
Item 8. Financial Statements and Supplementary Data
Table of Contents to Consolidated Financial Statements
Page
Report of Independent Certified Public Accountants 21
Consolidated Financial Statements:
Balance Sheets - October 31, 1996 and 1995 22
Statements of Operations - Years Ended
October 31, 1996, 1995 and 1994 23
Statements of Stockholders' Equity - Years
Ended October 31, 1996, 1995 and 1994 24
Statements of Cash Flows - Years Ended
October 31, 1996, 1995 and 1994 25
Notes to Consolidated Financial Statements 26-35
Schedules are omitted because of the conditions under which they are
required, or because the information required therein is set forth in
the consolidated financial statements or the notes thereto.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors of
nStor Technologies, Inc.
We have audited the accompanying consolidated balance sheets of nStor
Technologies, Inc. and subsidiaries as of October 31, 1996 and 1995
and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended
October 31, 1996. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial
position of nStor Technologies, Inc. and subsidiaries as of October
31, 1996 and 1995 and the results of their operations and their cash
flows for each of the three years in the period ended October 31,
1996 in conformity with generally accepted accounting principles.
BDO Seidman, LLP
Orlando, Florida
January 10, 1997
nSTOR TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
=========================================
(dollars in thousands)
October 31,
-----------------------
ASSETS (Note 2) 1996 1995
--------------- ---------- ----------
Current assets:
Cash and cash equivalents $ 10,608 $ 15
Accounts receivable 1,747 16
Inventories (Note 4) 1,385 -
Prepaid expenses and other 82 -
Investment in IMNET Systems, Inc. (Note 3) - 12,023
---------- ----------
Total current assets 13,822 12,054
Deferred tax asset (Note 5) 182 -
Furniture and equipment, net of $51
accumulated depreciation 694 -
Intellectual and other intangible
assets, net of $17
accumulated amortization 979 -
---------- ----------
$ 15,677 $ 12,054
LIABILITIES (Note 2) ========== ==========
--------------------
Current liabilities:
Accounts payable and other $ 1,694 $ 17
Notes payable (Note 7 ) - 629
Warranty liability 283 -
Royalty liability 800 -
---------- ----------
Total current liabilities 2,777 646
Convertible notes (Note 6) 510 476
---------- ----------
Total liabilities 3,287 1,122
---------- ----------
Commitments and contingencies (Notes 9 and 10)
STOCKHOLDERS' EQUITY (Note 2, 10 and 11)
----------------------------------------
Preferred stock, $.01 par; shares authorized
1,000,000; outstanding none - -
Common stock, $.05 par; shares authorized
24,000,000; outstanding 18,670,477 and
17,600,477 934 880
Additional paid-in capital 29,923 29,294
Net unrealized gain on securities
available for sale - 12,023
Deficit (18,467) (31,265)
---------- ----------
Total stockholders' equity 12,390 10,932
---------- ----------
$ 15,677 $ 12,054
========== ==========
______
See accompanying notes to consolidated financial statements.
nSTOR TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Note 2)
=====================================
(dollars in thousands, except per share data)
Year Ended October 31,
---------------------------------
1996 1995 1994
------- ------- -------
Sales (Note 8) $ 5,619 $ - $ -
Cost of sales 3,547 - -
-------- ------- --------
Gross profit 2,072 - -
-------- ------- --------
Operating expenses:
Research and development 701 - -
Selling, general and administrative 1,256 - -
-------- -------- --------
Total operating expenses 1,957 - -
-------- -------- --------
Income from operations 115 - -
Gain from sale of IMNET Systems,
Inc. stock (Note 3) 11,955 - -
Interest income, net of investment
expenses 234 9 20
Interest expense (72) (70) (91)
-------- -------- --------
Income (loss) before
extraordinary gain 12,232 (61) (71)
Extraordinary gain from debt
extinguishment (Note 7) 566 - 343
-------- -------- --------
Net income (loss) $12,798 ($ 61) $ 272
======== ======== ========
Per common share:
Income (loss) before
extraordinary gain $ .70 ($ .00) ($ .00)
Extraordinary gain .03 - .02
------- ------- -------
Net income (loss) $ .73 ($ .00) $ .02
======= ======= =======
Average number of common shares
outstanding 17,606,477 17,600,477 17,600,477
========== ========== ==========
______
See accompanying notes to consolidated financial statements.
nSTOR TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(NOTES 2, 10 and 11)
===============================================
(dollars in thousands)
Net
Unrealized
Common Stock Addi- Gain on
---------------- tional Securities
Par Paid-in Available
Shares Value Capital For Sale Deficit Total
---------- ----- -------- --------- -------- -------
Balances, October
31, 1993 17,600,477 $880 $29,294 $ - ($31,476) ($1,302)
Net income for the
year ended October
31, 1994 - - - - 272 272
---------- ---- ------- ------ ------- -------
Balances, October
31, 1994 17,600,477 880 29,294 - (31,204) (1,030)
Net unrealized gain
on securities
available for sale - - - 12,023 - 12,023
Net loss for the
year ended October
1995 - - - - (61) (61)
---------- ---- ------- ------- -------- --------
Balances, October
31, 1995 17,600,477 880 29,294 12,023 (31,265) 10,932
Change in net un-
realized gain on
securities avail-
able for sale - - - (12,023) - (12,023)
Issuance of common
stock in connec-
tion with:
Acquisition of
minority
interest 1,000,000 50 550 - - 600
Exercise of
warrants 60,000 3 57 - - 60
Extinguishment
of debt 10,000 1 22 - - 23
Net income for the
year ended
October 31, 1996 - - - - 12,798 12,798
---------- ----- ------- ------- ------- --------
Balances, October
31, 1996 18,670,477 $ 934 $29,923 $ - ($18,467) $12,390
========== ===== ======= ======= ======= ========
______
See accompanying notes to consolidated financial statements.
nSTOR TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Note 2)
=====================================
(in thousands)
Year Ended October 31,
---------------------------
1996 1995 1994
CASH FLOWS FROM OPERATING ACTIVITIES: ------- ------- -------
Net income (loss) $12,798 ($ 61) $ 272
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Gain from sale of IMNET Systems,
Inc. stock (11,955) - -
Extraordinary gain from debt
extinguishment (566) - (343)
Depreciation and amortization 68 - -
Deferred tax asset (182) - -
Minority interest in net income of
consolidated subsidiary 26 - -
Changes in assets and liabilities,
net of effects from acquisition:
Increase in accounts receivable (1,731) (16) -
Increase in inventories (391) - -
Increase in prepaid expenses
and other (82) - -
Increase in accounts payable
and other liabilities 1,574 66 60
------- ------- -------
Net cash used by operating activities (441) (11) (11)
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net proceeds from sale of IMNET
Systems, Inc. stock 11,955 - -
Cash paid for acquisition (592) - -
Additions to furniture and equipment (314) - -
------- ------- -------
Net cash provided by investing activities 11,049 - -
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock warrants 60 - -
Cash paid for debt extinguishment (75) - -
------- ------- -------
Net cash used by financing activities (15) - -
------- ------- -------
Net increase (decrease) in cash
and cash equivalents during the year 10,593 (11) (11)
Cash and cash equivalents at the
beginning of the year 15 26 37
------- ------- -------
Cash and cash equivalents at the end of the year $10,608 $ 15 $ 26
======= ======= =======
SUPPLEMENTAL SCHEDULE OF NON-CASH
INVESTING ACTIVITIES:
Acquisitions:
Fair value of assets acquired $ 2,348 $ - $ -
Liabilities assumed (1,156) - -
Common stock issued (600) - -
------- ------- -------
Cash paid $ 592 $ - $ -
_________ ======= ======= =======
See accompanying notes to consolidated financial statements.
nSTOR TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
==========================================
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Basis of Presentation
The consolidated financial statements include the accounts of nStor
Technologies, Inc. (formerly IMGE, Inc.) and all wholly-owned
subsidiaries (collectively, the "Company"). Significant
intercompany balances and transactions have been eliminated in
consolidation.
Business
The Company, through its operating subsidiary, nStor Corporation,
Inc. ("nStor" - see Note 2 to Consolidated Financial Statements)
has been engaged in the development, manufacture and marketing of
a full range of disk array products, known as RAID (Redundant Array
of Independent Disks) subsystems (the "RAID Business") since June
3, 1996, the effective date of nStor's acquisition of the RAID
Business (the "Acquisition"). nStor's RAID subsystems provide
users with high capacity, fault-tolerant storage, allow
uninterrupted access to data and support a variety of operating
systems. nStor's products are sold through a network of original
equipment manufacturers ("OEM's") and distributors located
worldwide.
Prior to the Acquisition, the Company's only assets were securities
issued by IMNET Systems, Inc. ("IMNET" - see Note 3 to Consolidated
Financial Statements), which the Company had acquired in October
1992 in exchange for substantially all of the Company's operating
assets. During the time in which the Company owned the IMNET
securities, the Company's only activities consisted of monitoring
its investment in IMNET and evaluating potential business
opportunities.
Fiscal Year
In November 1996, the Company changed its fiscal year from October
31 to December 31, effective with the calendar year beginning
January 1, 1997.
Investment Securities
Prior to the sale of IMNET securities in 1996 (see Note 3 to
Consolidated Financial Statements), the Company's investment in
IMNET was classified as available for sale and stated at fair
market value, with unrealized gains and losses excluded from
earnings and reported as a separate component of stockholders'
equity until realized.
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.
Revenue Recognition
Sales revenue is recognized upon shipment provided that there are
no significant post-sale obligations and the collectibility is
reasonably assured.
Warranty Costs
Warranty costs are provided on the basis of estimated net future
costs related to products sold.
Furniture, Equipment and Depreciation
Furniture and equipment is carried at cost. Depreciation is
provided under the straight-line method over the estimated useful
lives, principally five years.
Intellectual and Other Intangible Assets
Intellectual assets, consisting of trademarks and proprietary
technology, are carried at cost. Amortization is computed under
the straight-line method over the useful lives of the assets,
generally 15 years. The excess of cost over net assets acquired
(goodwill) is being amortized on a straight-line basis over 15
years.
The Financial Accounting Standards Board recently issued Statement
of Financial Accounting Standards No. 121 (SFAS 121), "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets
To Be Disposed Of", which the Company will be required to implement
for its fiscal year ending December 31, 1997. The statement
requires that long-lived assets must be reviewed for impairment
whenever events or changes in circumstances indicate that the
carrying amount of the asset may not be recoverable. If the sum of
the expected future cash flows (undiscounted and without interest
charges) from an asset to be held and used is less than the
carrying value of the asset, an impairment loss must be recognized
in the amount of the difference between the carrying value and fair
value. Assets to be disposed must be valued at the lower of
carrying value or fair value less costs to sell. The Company does
not expect adoption to have a material effect on its financial
position or results of operations.
Research and Development Costs
Research and development costs are expensed as incurred.
Income Taxes
Income taxes are provided on the liability method whereby deferred
tax assets and liabilities are recognized for the expected tax
consequences of temporary differences between the tax bases and
reported amounts of assets and liabilities.
Net Income (Loss) Per Common Share
Net income (loss) per common share is based on the weighted average
number of shares of common stock and common stock equivalents
outstanding during each period. During fiscal 1994 and 1995, there
were no common stock equivalents. The effect of common stock
equivalents in fiscal 1996 was not material.
Statements of Cash Flows
For purposes of the statements of cash flows, the Company considers
all unrestricted highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
During the periods presented, no interest was paid by the Company.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could 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
October 31, 1996.
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.
Reclassifications
Certain 1994 and 1995 amounts have been reclassified to conform to
the 1996 presentation.
Recently Issued Accounting Pronouncement
The Company is required to adopt the provisions of Statement of
Financial Accounting Standards No. 123, ("SFAS No. 123"),
Accounting for Stock Based Compensation during its fiscal year
ended Decembr 31, 1997. SFAS No. 123, among other things, requires
certain added disclosures regarding the fair value of equity
instruments, such as stock options, issued by the Company. In
addition, SFAS No. 123 encourages the recognition of expense for
the fair value of equity instruments issued by the Company.
The Company has not yet determined whether the optional expense
recognition provisions of SFAS No. 123 will be adopted, and
therefore, the effects of adopting SFAS No. 123 have not been
determined.
(2) ACQUISITIONS
Effective June 3, 1996, nStor acquired certain net assets (the
"Business") of Seagate Peripherals, Inc. ("Seagate") for $592,000
in cash, including acquisition costs, and a royalty to Seagate,
estimated at $800,000, payable based upon 5% of nStor's sales of
certain products during the 15 month period beginning October 1,
1996. At closing, the Company acquired 80% of the outstanding
stock of nStor for $500,000 in cash. Effective October 31, 1996,
the Company acquired the remaining 20% of nStor from R. Daniel
Smith, a director of the Company and the president and a director
of nStor, in exchange for one million shares of the Company's
common stock, valued at $600,000 (net of applicable discount ).
The minority interest in nStor's net income, amounting to $26,000,
has been included in operating expenses in fiscal 1996.
The acquisitions have been accounted for under the purchase method
of accounting, with assets acquired and liabilities assumed
recorded at estimated fair values as of the effective acquisition
dates, and the results of nStor's operations included in the
Company's consolidated financial statements from those dates. The
excess of the purchase price over the fair value of net assets
acquired (goodwill) approximated $381,000, which is being amortized
over 15 years.
The following unaudited proforma consolidated results of operations
have been prepared as if the acquisitions had occurred at the
beginning of fiscal 1996 and at January 1, 1995, the inception of
Seagate's operation of the Business. During its operation of the
Business, among other items, Seagate included a significant
allocation of its corporate overhead expenses to the operating
expenses of the Business. The proforma consolidated results do not
purport to be indicative of results that would have occurred had
the acquisitions occurred on those dates, or of future results (in
thousands):
Year Ended
October 31,
----------------------
1996 1995
---------- ----------
Net sales $14,915 $10,630
======= =======
Income (loss) before extraordinary
gain $11,014 ($ 2,661)
======= =======
Net income (loss) $11,580 ($ 2,661)
======= =======
Per common share:
Income (loss) before extra-
ordinary gain $.59 ($.14)
==== ====
Net income (loss) $.62 ($.14)
==== ====
(3) INVESTMENT IN IMNET SYSTEMS, INC. ("IMNET")
During 1996, a subsidiary of the Company sold all of its shares of
IMNET and received net proceeds of $11,955,000. For reporting
purposes, the Company had written off its entire investment in
IMNET in 1993, and accordingly, the Company recognized a gain of
$11,955,000 during 1996.
(4) INVENTORIES
At October 31, 1996, inventories are summarized as follows (in
thousands):
Raw materials $1,164
Work-in-process 143
Finished goods 78
------
$1,385
======
(5) INCOME TAXES
(a) As of December 31, 1995, the Company's tax year end, there
were unused net operating loss carryforwards (the "NOL's") for
regular federal income tax purposes of approximately $13.1
million for which no financial statement benefit had been
recognized. The Company expects to be able to utilize the
NOL's to offset fiscal 1996 regular federal taxable income.
The remaining NOL's, approximating $4.1 million as of October
31, 1996, principally expire in 2006. In addition, the
Company has research and development tax credit carryforwards
of approximately $453,000 which expire from 2002 through 2005
and in conjunction with the Alternative Minimum Tax ("AMT")
rules, the Company has available AMT credit carryforwards of
approximately $182,000, at October 31, 1996, which may be used
indefinitely to reduce regular federal income taxes.
(b) For the year ended October 31, 1996, the provision for federal
income tax expense (credit) is as follows (in thousands):
Current $182
Deferred (182)
----
-0-
====
(c) Income tax expense differs from the amount computed by
multiplying income before income tax expense by the statutory
federal income tax rate principally due to utilization of the
NOL's.
(d) The tax effects of temporary differences that gave rise to
significant portions of deferred tax assets follows (in
thousands):
October 31,
-------------------
1996 1995
-------- --------
NOL and tax credit carryforwards $ 2,025 $ 4,944
Investment in IMNET - 1,232
-------- --------
2,025 6,176
Less valuation allowance 1,843 (6,176)
-------- --------
Deferred tax asset $ 182 $ -
======== ========
(6) CONVERTIBLE NOTES
The Company's only long-term debt consists of convertible notes
with a carrying amount of $510,000 and $476,000 at October 31, 1996
and 1995, respectively. These notes have a face amount of
$400,000, have been discounted based on an effective interest rate
of 12%, include accrued interest of $197,000 and $189,000,
respectively, and mature in 2000. The notes are convertible into
160,000 shares of common stock of the Company (based on one
common share for each $2.50 of face amount).
(7) EXTRAORDINARY GAIN ON DEBT EXTINGUISHMENT
During 1996, the Company paid $75,000 in cash and issued 10,000
shares of its common stock in full satisfaction of the $664,000
outstanding balance (including accrued interest) of notes payable
which had been in dispute due to certain subordination provisions
contained in the notes. As a result of this settlement, the
Company recognized a $566,000 extraordinary gain from debt
extinguishment.
(8) SIGNIFICANT CUSTOMERS
One customer represented approximately 53% of sales for fiscal
1996. There are no other customers who accounted for 10% or more
during this period.
(9) LITIGATION
In June and August 1996, the Company, two of its directors and
nStor were served with two separate Complaints, 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 nStor (see Note 2 to Consolidated Financial
Statements). The plaintiffs seek compensatory damages, punitive
damages, and equitable relief for alleged interference with the
plaintiffs' alleged rights. Both cases are in preliminary stages;
however, the Company is unaware of any facts that would support any
of the plaintiff's claims and, accordingly, the Company believes
that the claims are without merit.
From time to time, the Company is subject to legal proceedings and
other claims arising in the ordinary course of business. In the
opinion of management, the Company is not a party to any litigation
the outcome of which would have a material adverse effect on its
business or operations.
(10) STOCK OPTIONS AND WARRANTS
Under the Company's 1996 Stock Option Plan (the "Plan"), qualified
and non-qualified stock options to purchase up to 2.5 million
shares of the Company's common stock may be granted to officers,
directors, key employees and non-employees, of which 1,050,000
shares have been granted as of October 31, 1996. Summarized
information related to the Plan and previously granted warrants and
stock options follows:
Number Option price
of shares per share
--------- ---------
Outstanding at October 31,
1994 and 1995 105,000 $1.00
Fiscal 1996:
Granted 1,050,000 $1.22-$2.10
Exercised (60,000) $1.00
Expired (45,000) $1.00
Outstanding at October 31,
1996 1,050,000 $1.22-$2.10
(11) SUBSEQUENT EVENT
Effective December 1, 1996, nStor acquired substantially all the
assets and assumed certain liabilities of Parity Systems, Inc.
("Parity"), a privately-owned company engaged in the design,
manufacture and sale of computer storage subsystems, memory devices
and peripheral equipment and the integration of storage management
solutions, digital media management, and client/server systems for
RISC-based UNIX and Windows NT Server environments. The purchase
price consisted of approximately $5.8 million in cash, including
approximately $3 million to repay the outstanding balance of
Parity's bank line of credit, and a warrant (exercisable at any
time during the three years following the Parity acquisition) to
purchase 500,000 shares of the Company's common stock at $2.10 per
share, the market price for the Company's common stock on October
17, 1996, the date of execution of the Letter of Intent regarding
the Parity acquisition.
(12) RELATED PARTY TRANSACTIONS
Hilcoast Advisory Services, Inc. ("Advisor")
Since July 1, 1996, Advisor has provided certain financial
consulting and administrative services to the Company under a one-year
agreement which provides for the payment of $6,000 per month,
plus reimbursement for all out-of-pocket expenses, and which may be
terminated by the Company upon 60 days notice and by Advisor upon
180 days notice. H. Irwin Levy, a director and principal
shareholder of the Company, is the Chairman of the Board, Chief
Executive Officer and a principal shareholder of the parent of
Advisor. Management believes that the terms of this agreement are
no less favorable to the Company than those that would be received
from other sources.
Intelligent Manufacturing Systems, Inc. ("IMS")
R. Daniel Smith, a director of the Company and the president and a
director of nStor, is also the chief executive officer and sole
shareholder of IMS, which specializes in providing software
solutions. In July 1996, nStor purchased an integrated software
package from IMS, including installation, consulting and training
support, at a cost of approximately $172,000. The software package
was purchased to facilitate the internal operations of nStor and
includes finance, planning and production, sales and marketing,
service and engineering modules. Management believes that the
terms of this transaction were no less favorable to nStor than
those that would be paid to other vendors.
(13) LEASES
nStor leases its operating facilities under operating leases which
expire at various dates through April 2000. At October 31, 1996,
future minimum rental payments under operating leases that have
initial or remaining terms in excess of one year are as follows (in
thousands):
1997 $164
1998 152
1999 152
2000 152
----
$620
====
Rent expense was $62,000 for the period ended October 31, 1996.
(14) 401(k) PLAN
nStor established a 401(k) deferred contribution plan covering
substantially all employees meeting certain minimum age and service
requirements. Contributions to the plan will be determined by the
Board of Directors. There were no contributions made to the plan
during the fiscal year ended October 31, 1996.
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 the Company's
definitive Proxy Statement (the "Proxy Statement") to be filed with
respect to the Company's 1997 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 20 of this Form 10-K.
(2) Financial statement schedules have been omitted because
of the conditions under which they are required, or
because the information required therein is set forth in
the Consolidated Financial Statements or the notes
thereto.
(3) Exhibits - See Exhibit Index at page 38 of this Form
10-K.
(b) The Registrant filed or amended reports on Form 8-K
during the fourth quarter of 1996 as follows:
(i) A report on Form 8-K/A dated June 18, 1996 and
filed September 3, 1996, reporting under Item 7 -
Financial Statements of Business Acquired, Proforma
Financial Information and Exhibits. (Reference
Form 8-K dated June 18, 1996, filed July 2, 1996)
EXHIBIT INDEX
Exhibit
Number Description
3.1 Certificate of Incorporation of the Company, as amended.
3.2 By-laws of the Company, as amended.
4.1 Certificate of Incorporation of the Company, as amended -
see Exhibit 3.1 above.
4.2 By-laws of the Company, as amended - see Exhibit 3.2 above.
10.1 Asset Purchase Agreement, dated May 23, 1996, between
Seagate Peripherals, Inc. as seller and Intelligent
Manufacturing Systems, Inc. as purchaser. (1)
10.2 Amendment No. 1 to the Asset Purchase Agreement, dated June
4, 1996, between Seagate Pheripherals, Inc. and Intelligent
Manufacturing Systems, Inc. (1)
10.3 Assignment of Asset Purchase Agreement by Intelligent
Manufacturing Systems, Inc. to nStor Corporation, Inc. (1)
10.4 Consent to Assignment of Asset Purchase Agreement by Seagate
Peripherals, Inc. (1)
10.5 Asset Purchase Agreement Between Parity Systems, Inc. and
nStor Corporation, Inc., dated November 30, 1996. (2)
10.6 Form of Warrant, dated December 30, 1996, granting Parity
Systems, Inc. the right to purchase 500,000 shares of the
Registrant's common stock. (2)
10.7 Agreement and Plan of Reorganization by and among nStor
Technologies, Inc., nStor Corporation, Inc. and R. Daniel
Smith, dated as of October 31, 1996.
10.8 1996 Stock Option Plan, dated October 5, 1996.
21 Subsidiaries of the Registrant.
27 Financial Data Schedule.
______________
(1) Incorporated by reference to Exhibits previously filed as Exhibits to
Registrant's Form 8-K/A dated June 18, 1996, filed September 3, 1996.
(2) Incorporated by reference to Exhibits previously filed as Exhibits to
Registrant's Form 8-K dated December 30, 1996, filed January 13, 1997.
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/ Jack Jaiven
By:_____________________________________
Jack Jaiven, Vice President
Dated: January 27, 1997
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/ Mark F. Levy
January 27, 1997 ______________________________________
Mark F. Levy, President and Director
/s/ Joseph D. Weingard
January 27, 1997 ______________________________________
Joseph D. Weingard, Vice President,
Secretary and Director
/s/ Jack Jaiven
January 27, 1997 ______________________________________
Jack Jaiven, Vice President,
Principal Financial Officer and
Principal Accounting Officer
/s/ H. Irwin Levy
January 27, 1997 ______________________________________
H. Irwin Levy, Director
/s/ R. Daniel Smith
January 27, 1997 _____________________________________
R. Daniel Smith, Director
January , 1997 ____________________________________
Michael L. Wise, Director