SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
__X___ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________________________
Commission File Number: 0-8354
nSTOR TECHNOLOGIES, INC.
(Formerly IMGE, Inc.)
(Exact name of Registrant as specified in its Charter)
Delaware 95-2094565
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 Century Blvd.
West Palm Beach, FL 33417
(Address of principal executive office)
(561) 640-3103
(Registrant's telephone number)
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 _____
Number of shares outstanding of the Registrant's Common Stock,
par value $.05 per share, as of March 31, 1997: 18,670,477
<PAGE>
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
The condensed financial statements included herein have
been prepared by the registrant, without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to
such rules and regulations; however, the registrant believes that
the disclosures are adequate to make the information presented not
misleading. It is suggested that these condensed financial
statements be read in conjunction with the financial statements and
the notes thereto included in the registrant's annual report on
Form 10-K for the fiscal year ended October 31, 1996 and its
transition report on Form 10-Q for the two months ended December
31, 1996.
The condensed financial statements for the interim
periods included herein, which are unaudited, include, in the
opinion of management, all adjustments (consisting only of normal
recurring adjustments) necessary to present fairly the financial
position and results of operations of the registrant for the
periods presented. The results of operations for interim periods
should not be considered indicative of results to be expected for
the full year.
<PAGE>
nSTOR TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands) (Note 2)
Mar. 31, Dec. 31,
ASSETS 1997 1996
------ --------- ---------
Current assets:
Cash and cash equivalents $ 2,247 $ 4,619
Accounts receivable, net of $243
and $257 allowance 5,783 5,016
Inventories (Note 3) 5,607 4,117
Prepaid expenses and other 158 129
------- -------
Total current assets 13,795 13,881
Deferred tax asset (Note 5) 200 182
Property and equipment, net of $169
and $90 accumulated depreciation 1,162 1,159
Goodwill and other intangible assets,
net of $160 and $60 accumulated
amortization (Note 2) 5,425 5,526
------- -------
$20,582 $20,748
======= =======
LIABILITIES
-----------
Current liabilities:
Accounts payable $ 4,391 $ 4,380
Accrued expenses and other 1,832 2,235
Royalty liability (Note 2) 712 800
------- -------
Total current liabilities $ 6,935 7,415
Convertible notes due 2000 (including
$200 and $197 of accrued interest) 526 516
------- -------
Total liabilities 7,461 7,931
------- -------
Commitments and contingencies (Note 6)
STOCKHOLDERS' EQUITY
--------------------
Preferred stock, $.01 par; shares
authorized 1,000,000; outstanding none - -
Common stock, $.05 par; shares authorized
24,000,000; outstanding 18,670,477 934 934
Additional paid-in capital 30,393 30,393
Deficit (18,206) (18,510)
------- -------
Total stockholders' equity 13,121 12,817
------- -------
$20,582 $20,748
======= =======
_______
See accompanying notes to consolidated financial statements.
<PAGE>
nSTOR TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share data) (Note 2)
Three Months
Ended March 31,
---------------------
1997 1996
--------- ---------
Sales (Note 5) $ 9,003 $ -
Cost of sales 5,892 -
------- -------
Gross profit 3,111 -
------- -------
Operating expenses:
Research and development 662 -
Selling, general and administrative 2,158 -
------- -------
Total operating expenses 2,820 -
------- -------
Income from operations 291 -
Gain from sale of IMNET Systems, Inc.
stock (Note 4) - 9,640
Interest income, net of investment expenses 31 (59)
Interest expense (18) (18)
------- -------
Net income $ 304 $9,563
======= =======
Primary and fully diluted earnings per
common share $ .02 $ .54
======= =======
Average number of common shares used
in computing primary and fully diluted
earnings per common share 18,778,204 17,600,477
========== ==========
_______
See accompanying notes to consolidated financial statements.
<PAGE>
nSTOR TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(dollars in thousands)
Addi-
Common Stock tional
----------------- Paid-In
Shares Amount Capital Deficit Total
---------- ------ ------- ------- -------
Balances, December
31, 1996 18,670,477 $934 $30,393 ($18,510) $12,817
Net income for the
three months
ended March
31, 1997 - - - 304 304
---------- ---- ------- ------- -------
Balances, March
31, 1997 18,670,477 $934 $30,393 ($18,206) $13,121
========== ==== ======= ======= =======
_______
See accompanying notes to consolidated financial statements.
<PAGE>
nSTOR TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) (Note 2)
Three Months
Ended March 31,
--------------------
1997 1996
--------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 304 $ 9,563
Adjustments to reconcile net income
to net cash used by operating
activities:
Gain from sale of IMNET Systems,
Inc. stock - (9,640)
Depreciation and amortization 180 -
Changes in assets and liabilities:
Increase in accounts receivable (767) -
Increase in inventories (1,490) -
Increase in prepaid expenses
and other (47) -
(Decrease) increase in accounts
payable, accrued expenses and
other liabilities (382) 6
Decrease in royalty liability (88) -
-------- --------
Net cash used by operating activities (2,290) (71)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net proceeds from sale of IMNET
Systems, Inc. stock - 9,640
Additions to property and equipment (82) -
-------- -------
Net cash (used) provided by
investing activities (82) 9,640
-------- -------
Net (decrease) increase in cash
during the period (2,372) 9,569
Cash at the beginning of the period 4,619 7
-------- -------
Cash at the end of the period $ 2,247 $ 9,576
======== =======
_______
See accompanying notes to consolidated financial statements.
<PAGE>
nSTOR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
Since June 3, 1996, nStor Technologies, Inc. (the "Company") 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"), which
provide users with high capacity, fault-tolerant storage, allow
uninterrupted access to data and support a variety of operating
systems. Since December 1, 1996, the Company has also been engaged
in the development, manufacture and marketing of memory devices and
peripheral equipment, and the integration of storage management
solutions, digital media management and client/server environments
for RISC-based UNIX and Windows NT Server environments (the "Parity
Business"). (See Note 2 to Consolidated Financial Statements).
Prior to the acquisition of the RAID Business (effective June 3,
1996), 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 fiscal 1996, the Company sold 100% of the
IMNET securities (see Note 4 to Consolidated Financial Statements).
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. Certain amounts in the financial statements
presented for the previous fiscal 1996 period have been restated to
conform to the new fiscal 1996 presentation.
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.
<PAGE>
(2) ACQUISITIONS
Effective June 3, 1996, a newly-formed 80% subsidiary of the
Company (the "Operating Subsidiary") acquired the RAID Business
(see Note 1 to Consolidated Financial Statements), consisting of
certain net assets of Seagate Peripherals, Inc. located in Lake
Mary, Florida. The purchase price consisted of $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.
Effective October 31, 1996, the Company acquired the remaining 20%
of the Operating Subsidiary from R. Daniel Smith, president of the
Operating Subsidiary and currently a director of the Company, in
exchange for one million shares of the Company's common stock,
valued at $600,000 (net of applicable discount).
Effective December 1, 1996, nStor acquired the Parity Business (see
Note 1 to Consolidated Financial Statements), consisting of
substantially all the net assets of Parity Systems, Inc.
("Parity"), a privately-owned company located in Los Gatos,
California. The purchase price consisted of $2.8 million in cash
and a warrant (exercisable at any time through December 1999) to
purchase 500,000 shares of the Company's common stock at $2.10 per
share, valued at $470,000. The transaction closed on December 30,
1996, on which date the Company repaid the approximately $3 million
outstanding balance of Parity's bank line of credit.
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 operating results of the acquired businesses
included in the Company's consolidated financial statements from
those dates. Allocation of the purchase price of the Parity
Business has been made on a preliminary basis, subject to
adjustment should new or additional facts about the business become
known. The excess of the purchase price of the acquisitions over
the fair value of net assets acquired (goodwill - $4,823,000, net
of accumulated amortization of $127,000, at March 31, 1997) is
being amortized on a straight-line basis over 15 years. The
Company also recorded intellectual assets, consisting of trademarks
and proprietary technology ($602,000, net of accumulated
amortization of $33,000 at March 31, 1997), which are being
amortized on a straight-line basis over 15 years. For the three
months ended March 31, 1997, amortization of intangible assets
aggregated $100,000.
<PAGE>
(3) INVENTORIES
Inventories are summarized as follows (in thousands):
Mar. 31, Dec. 31,
1997 1996
-------- --------
Raw materials $ 5,125 $ 3,577
Work-in-process - 88
Finished goods 482 452
------- -------
$ 5,607 $ 4,117
======= =======
(4) GAIN ON SALE OF IMNET
During the quarter ended March 31, 1996, the Company sold a
substantial portion of its shares of IMNET (see Note 1 to
Consolidated Financial Statements) and recognized a gain of
$9,640,000, representing the net cash proceeds received.
(5) INCOME TAXES
As of December 31, 1996, the Company's tax year end, there were
unused net operating loss carryforwards ("NOL's") for regular
federal income tax purposes of approximately $4.3 million,
principally expiring from 2003 until 2006, and research and
development tax credit carryforwards of approximately $500,000,
expiring from 2002 through 2005. No financial statement benefit
has been recognized on these carryforwards. During the three
months ended March 31, 1997 and 1996, no income tax expense was
recorded on income before income taxes due to utilization of NOL's.
In conjunction with the Alternative Minimum Tax ("AMT") rules, the
Company also has available AMT credit carryforwards of
approximately $200,000, at December 31, 1996, which may be used
indefinitely to reduce regular federal income taxes.
(6) CONTINGENCIES
See Part II, Item 1, for a discussion of the Company's Legal
Proceedings.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
The Company acquired the RAID Business and the Parity Business,
effective June 3, 1996 and December 1, 1996, respectively.
Allocations have been made to reflect the estimated fair values, as
of the effective acquisition dates, of the net assets acquired
which has resulted in asset bases which differ from those of the
previous owners. Accordingly, comparative financial data of the
RAID Business and the Parity Business for periods prior to the
effective dates of the acquisitions are not presented in this
section since they would be neither comparable nor informative.
Results of Operations
The Company reported net income of $304,000 for the three months
ended March 31, 1997 as compared to net income of $9,563,000 for
the corresponding period in 1996. The 1996 results included a gain
of $9,640,000 from the sale of approximately 84% of the Company's
investment in IMNET.
From the date the Company disposed of substantially all of its
operating assets in October 1992 in exchange for shares in IMNET
until the acquisition of the RAID Business in June 1996, the
Company's only activities consisted of monitoring its investment in
IMNET and evaluating potential business opportunities.
Accordingly, operating results for the three months ended March 31,
1996 principally consisted of the aforementioned gain and
administrative expenses.
Sales
For the three months ended March 31, 1997, nStor's net sales
amounted to $9,003,000. Future sales are expected to be
positively affected during the remainder of fiscal 1997 due to the
Company's recent introduction of new RAID products, the completion
of agreements with several new OEM's (original equipment
manufacturers) and as Parity's customer base is introduced to the
Company's existing product line. 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 the Company's products,
improvements in alternative technologies, a lack of market
acceptance for new products introduced by the Company and the
Company's failure to successfully market its products.
<PAGE>
Cost of Sales/Gross Margin
Gross margins for the three months ended March 31, 1997 amounted to
35%. The Company's gross margins are dependent, in part, on
product mix which is anticipated to fluctuate from time to time.
The Company has been able to increase its gross margins over those
achieved by its predecessors due to a greater emphasis on selling
higher margin enhanced storage devices and certain cost
efficiencies. Although gross margins on product sales associated
with the Parity Business have been less than those achieved by RAID
Business sales, the Company expects to be able to gradually
increase gross margins on the Parity product line during 1997 as
operating efficiencies are realized and the Company's component
servicing capabilities allow the Parity product line to be
manufactured at a lower cost. Operating efficiencies are expected
to be achieved as a result of closing the former Parity
manufacturing facility in California during April 1997, resulting
in the consolidation of direct labor, purchasing and other
functions at the Company's Florida facility. The foregoing
statements regarding increases in 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 the Company's products, increased labor costs, higher
production costs for new products developed by the Company,
decreases in the price of the Company's products, and a shift in
product sales to less profitable products.
Operating Expenses
The Company's operating expenses for the three months ended March
31, 1997 amounted to $2,820,000, consisting of $662,000 in
research, development and other engineering costs and $2,158,000 in
selling, general and administrative expenses. Operating expenses
are expected to increase in the future as the Company continues to
focus on improvements and innovations to its existing product lines
and expansion of its customer base. However, the Company expects
to realize certain operating efficiencies commencing in the second
quarter of fiscal 1997 as duplicate activities, including certain
administrative support and engineering functions, and duplicate
locations are eliminated. The foregoing statements regarding
achieving operating efficiencies 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 the Company's work force,
unexpected delays in consolidating the Company's physical plants
and production capabilities, and delays in the integration of the
Company's operational and sales efforts with those of the Parity
Business.
<PAGE>
Income Taxes
Income tax expense was not provided on the Company's income before
income taxes during the three months ended March 31, 1997 and 1996
due to utilization of the NOL's (see Note 5 to Consolidated
Financial Statements).
Liquidity and Capital Resources
Net cash used by operating activities increased to $2,290,000
during the three months ended March 31, 1997, as compared to
$71,000 in 1996, principally attributable to increases in accounts
receivable ($767,000) and inventories ($1,490,000), and decreases
in accounts payable, accrued expenses and other liabilities
($382,000).
Since the acquisition of the RAID Business in June 1996, the
Company's working capital needs, including the approximately $5.8
million in cash required for the Parity Acquisition, have been
funded by cash flow from operations and the Company's cash
balances. At March 31, 1997, the Company's cash and cash
equivalents amounted to $2,247,000 of which $1,720,000 was invested
in high quality short-term corporate or government securities. The
Company is presently negotiating for a $7 million asset-based bank
line of credit to finance its expanding working capital needs and
maintain a high level of liquidity. Management believes that cash
flow generated from operations, the Company's cash balances and the
anticipated bank line of credit will be sufficient to satisfy its
working capital and capital expenditure needs for the next twelve
months as currently planned.
Effect of Inflation
Inflation has not had an impact on the Company's operations and is
not expected to 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-Q, 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 the Company's future
cash flows, sales, gross margins and operating expenses, the effect
of conditions in the technology industry and the economy in
<PAGE>
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-Q and in other
reports filed by the Company with the Securities and Exchange
Commission.
Part II - Other Information
Item 1 - Legal Proceedings
In June and August 1996, the Company and two of its 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 the RAID Business acquired by
the Company (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. 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
plaintiff's claims and, accordingly, the Company believes that the
claims are without merit.
Item 6 - Exhibits and Reports on Form 8-K:
(a) Exhibits:
(27) Financial Data Schedule
(b) Reports on Form 8-K:
The Company filed or amended Form 8-K during the quarter
ended March 31, 1997 as follows:
(i) A report on Form 8-K dated December 30, 1996 and
filed January 13, 1997, reporting under Item 2 -
Acquisition or Disposition of Assets, in which the
Company reported the acquisition of the Parity
Business.
<PAGE>
(ii) A report on Form 8-K/A dated December 30, 1996 and
filed March 14, 1997, reporting under Item 7 -
Financial Statements of Business Acquired, Proforma
Financial Information and Exhibits. (Reference Form
8-K dated December 30, 1996, filed January 13,
1997.)
SIGNATURE
Pursuant to the requirements 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.
(Registrant)
/s/ Jack Jaiven
April 16, 1997 ______________________________
Jack Jaiven, Vice President
and Principal Financial and
Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000075448
<NAME> NSTOR TECHNOLOGIES, INC.
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 2,247
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<RECEIVABLES> 6,026
<ALLOWANCES> 243
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0
0
<COMMON> 934
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<FN>
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</FN>
</TABLE>
