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 June 30, 2000
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.
(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.)
10140 Mesa Rim Road
San Diego, CA 92121
(Address of principal executive office)
(858) 453-9191
--------------
(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 July 31, 2000: 34,806,931
<PAGE>
nSTOR TECHNOLOGIES, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Page
Number
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30,
2000 (Unaudited) and December 31, 1999 3
Consolidated Statements of Operations
(Unaudited) for the three and six months
ended June 30, 2000 and 1999 4
Consolidated Statements of Stockholders'
Equity (Unaudited) for the six months
ended June 30, 2000 5
Consolidated Statements of Cash Flows
(Unaudited) for the six months ended
June 30, 2000 and 1999 6-7
Notes to Consolidated Financial Statements
(Unaudited) 8-14
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 14-19
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 19
Part II. OTHER INFORMATION 20
SIGNATURE 21
<PAGE>
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
nSTOR TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
June 30,
2000 Dec. 31,
ASSETS (unaudited) 1999
------ --------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 80 $ 650
Accounts receivable 6,311 7,326
Inventories 7,738 6,288
Prepaid expenses and other 1,498 1,637
------- -------
Total current assets 15,627 15,901
Property and equipment, net 3,026 3,476
Goodwill and other intangible assets, net 15,663 14,533
Other assets - 131
------- -------
$34,316 $34,041
LIABILITIES ======= =======
-----------
Current liabilities:
Bank line of credit $ 5,251 $ 5,111
Director loan 550 1,585
Deferred revenue 2,357 2,426
Accounts payable and other 9,578 12,317
------- -------
Total current liabilities 17,736 21,439
Long-term debt 5,345 6,329
------- -------
Total liabilities 23,081 27,768
------- -------
STOCKHOLDERS' EQUITY
--------------------
Preferred stock, $.01 par; shares authorized 1,000,000
in order of preference:
Convertible Preferred Stock (aggregate liquidation
value $1,000 per share except for Series A which is
$600 per share) issued and outstanding at June 30, 2000
and December 31, 1999; Series F, 872 and 4,054; Series
A, 0 and 1,667; Series C, 3,000; Series D, 2,000 and
2,700; Series E, 3,500 - -
Common stock, $.05 par; shares authorized 75,000,000;
31,806,931 and 26,517,824 shares issued and outstanding
at June 30, 2000 and December 31, 1999, respectively 1,589 1,331
Additional paid-in capital 68,517 63,164
Deficit (58,871) (58,222)
------- -------
Total stockholders' equity 11,235 6,273
------- -------
$34,316 $34,041
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
nSTOR TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
------------------ ------------------
2000 1999 2000 1999
(unaudited) (unaudited)
------- ------- ------- -------
<S> <C> <C> <C> <C>
Sales $10,865 $ 9,398 $23,405 $10,809
Cost of sales 7,569 8,166 16,538 9,489
------- ------- ------- -------
Gross profit 3,296 1,232 6,867 1,320
------- ------- ------- -------
Operating expenses:
Selling, general and administrative 4,186 3,447 8,683 4,882
Research and development 894 699 1,510 1,218
Depreciation and amortization 1,146 583 2,262 978
------- ------- ------- -------
Total operating expenses 6,226 4,729 12,455 7,078
------- ------- ------- -------
Operating loss (2,930) (3,497) (5,588) (5,758)
Gain on sale of assets of Borg
Adaptive Technologies (Note 7) - - 5,575 -
Other income, net 350 44 381 144
Interest expense (316) (491) (614) (801)
------- ------- ------- -------
Net loss (2,896) (3,944) (246) (6,415)
Preferred stock dividends (192) (174) (403) (306)
Embedded dividends attributable to
beneficial conversion privileges and
warrants issued in connection with
Convertible Preferred Stock - (240) - (327)
------- ------- ------- -------
Net loss applicable to
common stock ($ 3,088) ($ 4,358) ($ 649) ($ 7,048)
======= ======= ======= =======
Basic and diluted net loss per
common share ($ .10) ($ .19) ($ .02) ($ .32)
======= ======= ======= =======
Weighted average number of common shares
used in per share computation, basic
and diluted 31,651,435 22,488,906 30,603,864 21,838,532
========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
nSTOR TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(dollars in thousands)
<TABLE>
<CAPTION>
Preferred Addi-
Common Stock Stock tional
----------------- ------------- Paid-In
Shares Amount Shares Amount Capital Deficit Total
---------- ------ ------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, December
31, 1999 26,517,824 $1,331 14,921 $ - $63,164 ($58,222) $ 6,273
Issuance of common stock
in connection with:
Conversion of
Convertible
Preferred Stock:
Series A 1,666,667 83 (1,667) - (83) -
Series D 700,000 35 (700) - (35) -
Series F 1,060,800 53 (3,182) - (53) -
Acquisition of assets
of OneofUs 776,119 39 2,561 2,600
Satisfaction of borrowings 296,296 15 985 1,000
Commitment to
terminated executives 123,479 - - -
Exercise of options and
warrants 629,089 31 1,147 1,178
Equity line of credit
net of costs of $83 36,657 2 13 15
Compensation expense resulting
from modifications to stock
options and warrants in
connection with the sale of
assets of Borg Adaptive
Technologies 818 818
Preferred stock dividends (403) (403)
Net loss for the six
months ended June 30, 2000 (246) (246)
---------- ------ ------ ------ ------- ------- -------
Balances, June 30,
2000 (unaudited) 31,806,931 $1,589 9,372 $ - $68,517 ($58,871) $11,235
========== ====== ====== ====== ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
nSTOR TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Six Months
Ended June 30,
-------------------
2000 1999
(unaudited) (unaudited)
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($ 246) ($ 6,415)
Adjustments to reconcile net loss to net
cash used by operating activities:
Gain on sale of assets of Borg Adaptive
Technologies (5,575) -
Amortization of intangible assets 1,281 373
Depreciation 981 605
Provision for losses on accounts receivable 15 853
Provision for inventory obsolescence - 707
Amortization of deferred financing costs and other 16 494
Changes in assets and liabilities, net of
effects from acquisitions:
Decrease (increase) in accounts receivable 1,089 (2,713)
Increase in inventories (1,450) (765)
Decrease in prepaid expenses and other 153 140
Decrease in accounts payable and other (2,790) (534)
-------- --------
Net cash used by operating activities (6,526) (7,255)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net proceeds from sale of assets of Borg Adaptive
Technologies 7,013 -
Additions to property and equipment (565) (216)
Cash paid for acquisitions (293) (1,250)
-------- --------
Net cash provided (used) by investing activities 6,155 (1,466)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from revolving credit facilities 140 363
Additions to other borrowings 650 5,407
Repayment on other borrowings (1,685) (1,100)
Issuance of preferred stock - 2,000
Proceeds from exercise of stock options
and warrants 1,178 1,554
Issuance of common stock, net of transaction costs 15 1,000
Cash paid for preferred stock dividends (497) (288)
-------- --------
Net cash (used) provided by financing activities (199) 8,936
-------- --------
Net (decrease) increase in unrestricted cash
and cash equivalents during the period (570) 215
Unrestricted cash and cash equivalents at the
beginning of the period 650 147
-------- --------
Unrestricted cash and cash equivalents at the
end of the period $ 80 $ 362
======== ========
</TABLE>
<PAGE>
nSTOR TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(concluded)
<TABLE>
<CAPTION>
Six Months
Ended June 30,
-----------------------
2000 1999
(unaudited) (unaudited)
----------- -----------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during period for interest $ 539 $ 454
======== ========
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES:
Non-Cash Investing Activities:
Acquisitions (Note 2):
Fair value of assets acquired $ 2,969 $ 27,986
Liabilities assumed or incurred (76) (21,882)
Series F Convertible Preferred Stock issued - (4,654)
Common stock issued (2,600) -
Warrants issued - (200)
-------- --------
Cash paid $ 293 $ 1,250
======== ========
NON-CASH FINANCING ACTIVITIES:
Issuance of common stock in satisfaction of
borrowings $ 1,000 $ 1,290
======== ========
Issuance of preferred stock in satisfaction
of borrowings $ - $ 1,500
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
nSTOR TECHNOLOGIES, INC.
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. and all wholly-owned subsidiaries (collectively, the
"Company"). Significant intercompany balances and transactions have been
eliminated in consolidation.
In the opinion of management, the unaudited consolidated financial statements
furnished herein include all adjustments, consisting only of recurring
adjustments necessary for a fair presentation of the results of operations for
the interim periods presented. These interim results of operations are not
necessarily indicative of results for the entire year. The consolidated
financial statements contained herein should be read in conjunction with the
consolidated financial statements and related notes contained in the Company's
1999 Annual Report on Form 10-K.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required for complete financial statements.
Certain items in the consolidated financial statements for the interim periods
ended June 30, 1999 have been reclassified to conform with the current
presentation. These reclassifications had no impact on operating results
previously reported.
Business
The Company is engaged as a manufacturer and supplier of high-availability,
high-performance enterprise-class Storage Area Network (SAN) solutions for the
Windows NT, UNIX and Linux computer operating systems. Designed for
storage-intensive environments such as the Internet or other mission-critical
applications, the Company's products include Fibre Channel and SCSI RAID-ready
solutions, non-RAID storage products, tape backup products and advanced storage
management software solutions. The Company markets its products through a direct
sales force and a global network of resellers and original equipment
manufacturers (OEM's).
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.
Net Loss Per Common Share ("EPS")
The effect of including potentially dilutive securities in the EPS calculation
would have been anti-dilutive. Accordingly, basic and diluted EPS for all
periods presented are equivalent.
<PAGE>
The following table presents an analysis of the Company's outstanding
securities as of June 30, 2000, including 11,833,664 outstanding potentially
dilutive securities:
Common shares outstanding 31,806,931
Potentially dilutive securities:
Convertible preferred stock 6,457,199
Stock options and warrants 5,216,465
Convertible notes 160,000
---------
11,833,664
----------
43,640,595
==========
(2) ACQUISITION OF ASSETS OF ONEOFUS COMPANY, LTD.
On January 19, 2000, the Company acquired substantially all of the assets of
OneofUs Company Limited (OneofUs) for an aggregate purchase price of $2.9
million, consisting of $.3 million cash and 776,119 shares of the Company's
common stock with an aggregate value of $2.6 million (based on the average of
the closing prices of the Company's stock during the ten (10) trading days ended
January 19, 2000). The shares were issued to four selling stockholders pursuant
to employment agreements or a confidentiality, noncompetition and
nonsolicitation agreement. OneofUs was a Taiwan-based, privately-held designer
of high performance Fibre Channel RAID controllers and storage solutions for
open systems and the SAN market.
The acquisition of OneofUs has been accounted for using the purchase method of
accounting with assets acquired and liabilities assumed recorded at their fair
values as of the date of acquisition. Allocation of the purchase price 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 over the fair
value of net assets acquired (goodwill) approximated $2.8 million and is being
amortized over seven years.
(3) BALANCE SHEET COMPONENTS (in thousands)
Substantially all assets are pledged as collateral for indebtedness (Note 4).
June 30,
2000 Dec. 31,
(unaudited) 1999
------- -------
Accounts Receivable
Trade receivables $ 8,136 $ 8,759
Less allowance for doubtful accounts (1,912) (1,604)
------- -------
6,224 7,155
Other receivables 87 171
------- -------
$ 6,311 $ 7,326
======= =======
<PAGE>
June 30,
2000 Dec.31,
(unaudited) 1999
-------- -------
Inventories
Raw materials $ 6,810 $ 4,942
Work-in-process 209 454
Finished goods 719 892
------- -------
$ 7,738 $ 6,288
======= =======
Inventories 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 and slow moving inventory to estimated net
realizable value.
Prepaid expenses and other
Prepaid service costs $ 1,200 $ 1,174
Other 298 463
------- -------
$ 1,498 $ 1,637
======= =======
Property and Equipment
Computer equipment $ 4,574 $ 4,075
Computer software 770 770
Leasehold improvements 788 788
Furniture, fixtures
and office equipment 355 465
Other 310 310
------- -------
6,797 6,408
Less accumulated depreciation (3,771) (2,932)
------- -------
$ 3,026 $ 3,476
======= =======
Property and equipment are stated at cost. Depreciation is provided under the
straight-line method over the estimated useful lives, principally five years.
Leasehold improvements are amortized on a straight-line basis over the shorter
of the useful life of the asset or the lease term. Depreciation and amortization
of property and equipment amounted to $509,000 and $981,000 for the three and
six months ended June 30, 2000, respectively, and $332,000 and $605,000 for the
three and six months ended June 30, 1999, respectively.
Goodwill and Other Intangible Assets
Goodwill $17,818 $15,497
Intellectual assets 347 347
------- -------
18,165 15,844
Less accumulated amortization (2,502) (1,311)
------- -------
$15,663 $14,533
======= =======
<PAGE>
Goodwill represents the excess cost of acquired businesses over the fair value
of net assets acquired and is principally amortized over seven years.
Intellectual assets consist of trademarks and proprietary technology and are
being amortized over 15 years. Amortization of goodwill and other intangible
assets amounted to $638,000 and $1,281,000 for the three and six months ended
June 30, 2000, respectively, and $251,000 and $373,000 for the three and six
months ended June 30, 1999, respectively.
June 30,
2000 Dec. 31,
(unaudited) 1999
-------- -------
Accounts payable and other
Accounts payable $ 5,371 $ 8,072
Accrued liabilities and other 4,207 4,245
------- -------
$ 9,578 $12,317
======= =======
(4) Borrowings
Short-Term Debt
Revolving Credit Facility ("Bank Line of Credit")
The Bank Line of Credit provides for borrowings based on the lesser of $10
million or: (i) 85% of eligible accounts receivable, as defined, plus (ii) the
lesser of $1.75 million or 23% of eligible inventory, as defined. The Bank Line
of Credit currently bears interest at prime (9.5% at June 30, 2000) plus 1/2
percent, matures in April 2002 and requires a facility fee of .25% based on the
average unused portion of the maximum borrowings. Advances under the Bank Line
of Credit are collateralized by a significant portion of the Company's assets.
The Bank Line of Credit provides for certain financial covenants, including
tangible net worth requirements. As of June 30, 2000, the outstanding balance of
the Bank Line of Credit was $5.3 million and an additional approximately $.3
million was available based on eligible collateral.
During 2000, the Company has not been in compliance with the minimum tangible
net worth covenant of the Bank Line of Credit, and , as a result, such line of
credit is in technical default. Effective March 29, 2000, the lender agreed to
waive the default related to the first quarter of 2000. Effective April 14,
2000, the Company agreed with the lender to amend certain terms of the Bank Line
of Credit, including an increase in the interest rate and new minimum net worth
and net income covenants on a consolidated basis. All other significant
provisions of the Bank Line of Credit are expected to remain the same. The
Company is currently in discussions with the lender to finalize this amendment.
Director Loans
At December 31, 1999, current borrowings included $1.6 million due to H. Irwin
Levy, Chairman of the Board of Directors and a principal stockholder of the
Company ("Mr. Levy"), representing the maximum amount available under a
revolving line of credit facility which bore interest at 10% per annum, due 30
days from demand. In January 2000, the promissory note was paid off and
satisfied in full. Effective April 12, 2000, Mr. Levy agreed to commit to a $2
million revolving line of credit facility to the Company (subsequently increased
to $2.5 million effective July 31, 2000), which matures on April 30, 2001, as
revised. Advances under this commitment bear interest at 10% per annum and
<PAGE>
amounted to $550,000 as of June 30, 2000 (consisting of $650,000 advanced and
$100,000 repaid). On August 1, 2000, the Company borrowed an additional $500,000
under this commitment.
Long-Term Debt
At June 30, 2000, long-term debt consisted of $5.1 million which bears
interest at 9.5% per annum and matures in June 2004 and $250,000 which bears
interest at 10% per annum and matures in September 2001. On April 26, 2000, the
Company issued 296,296 shares of its common stock in full satisfaction of $1
million of debt which was scheduled to mature in September 2001.
(5) CONVERTIBLE PREFERRED STOCK
At December 31, 1999, the Company had five classes of convertible preferred
stock (Series A, C, D, E and F) with an aggregate stated value of $14.3 million.
During the six months ended June 30, 2000, preferred stock with an aggregate
stated value of $4.9 million was converted into 3,427,467 shares of the
Company's common stock, thereby reducing the aggregate stated value at June 30,
2000 to $9.4 million, convertible into 6,457,199 shares, consisting of the
following:
Series C preferred stock with a stated value of $3 million, held by Mr. Levy,
accrued dividends at 8% per annum, payable quarterly. In accordance with an
automatic conversion feature, in July 2000, the Series C preferred stock was
automatically converted into 3,000,000 shares of the Company's common stock.
Series D preferred stock, with an aggregate stated value of $2.0 million at June
30, 2000, accrues dividends at 8% per annum, payable quarterly, is convertible
at any time into an aggregate of 2,000,000 shares of the Company's common stock,
and has an automatic conversion feature in which each share not converted by
October 2001 is automatically converted into common stock. Series E and F
preferred stock, with an aggregate stated value of $4.4 million at June 30,
2000, accrues dividends at 8% through June 7, 2000, 9% commencing June 8, 2000
and 10% commencing June 8, 2001, and is convertible at any time into an
aggregate of 1,457,000 shares of the Company's common stock. At June 30, 2000, a
company controlled by Mr. Levy held Series E preferred stock with an aggregate
stated value of $1.5 million convertible into 500,000 shares of the Company's
common stock.
(6) COMMON STOCK
On May 9, 2000, the Company entered into an agreement with a private
investment group granting the Company a one-year $15 million equity line or
equity draw down facility. The agreement does not obligate the Company to draw
any of the funds. Once per draw down period, the Company may request a draw of
up to $5 million, subject to a formula based on average stock price and average
trading volume, setting the maximum amount of any request for any given draw.
The amount of money that the investment group will provide to the Company and
the number of shares the Company will issue to the investment group in return
for that money is settled on a weekly basis during a 22 day trading period
following the draw request based on a formula as defined in the stock purchase
agreement. The investment group receives a 7% discount to the market price for
the 22 day period and the Company receives the settled amount of the draw down
less a 4% fee payable to the placement agent.
<PAGE>
In connection with this agreement, the Company granted the investment group
and the placement agent three year warrants to purchase an aggregate of 220,000
shares of the Company's common stock at an exercise price of $3.60 per share,
representing 120% of the average of the closing prices of the Company's common
stock for the five trading days before May 9, 2000.
The Company registered for resale the securities to be sold pursuant to the
draw downs and warrants.
During June 2000, the Company issued 36,657 shares of common stock and
received net proceeds of $98,000 pursuant to this agreement. In the accompanying
Statement of Stockholders' Equity, the approximate $83,000 of transaction costs
incurred to complete this agreement have been charged to additional paid-in
capital.
(7) GAIN ON SALE OF ASSETS OF BORG ADAPTIVE TECHNOLOGIES
On January 10, 2000, the Company sold substantially all of the assets of Borg
Adaptive Technologies, Inc., a wholly-owned subsidiary of the Company, to a
wholly-owned subsidiary of QLogic Corporation, for $7 million cash (net of
approximately $.5 million of transaction costs - the "Borg Sale"). The assets
included all of the intellectual property rights relating to the Company's
Adaptive RAID technology, including software, patents and trademarks, and
certain tangible assets, including test and office equipment and tenant
improvements, subject to the right of the Company to the use of all intellectual
property for its own use. In connection with the Borg Sale, the Company recorded
a gain of $5.6 million, net of compensation expense of $.8 million resulting
from modifications to certain stock options and warrants.
(8) INCOME TAXES
The Company accounts for income taxes in accordance with SFAS 109, which
requires recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Under the SFAS 109 asset and liability method,
deferred tax assets and liabilities are determined based upon the difference
between the financial statement and tax bases of assets and liabilities using
enacted tax rates in effect for the year(s) in which the differences are
expected to reverse.
As of December 31, 1999, there were unused net operating loss carryforwards
(the "NOL's") for regular federal income tax purposes of approximately $36
million and California tax purposes of approximately $4.7 million expiring from
2012 through 2019 and 2001 through 2004, respectively. In addition, the Company
has research and development tax credit carryforwards of approximately $1.4
million which expire from 2002 through 2019 and in conjunction with the
Alternative Minimum Tax ("AMT") rules, the Company has available AMT credit
carryforwards of approximately $.8 million, at December 31, 1999, which may be
used indefinitely to reduce regular federal income taxes.
The usage of approximately $8 million of the federal NOL carryforwards and
approximately $2 million of the California NOL carryforwards is limited annually
to approximately $.4 million due to an acquisition which caused a change in
ownership for income tax purposes.
<PAGE>
At June 30, 2000 and December 31, 1999, a 100% valuation allowance has been
provided on the Company's deferred tax assets because it is more likely than not
that loss carryforwards will not be realized based on recent operating results.
(9) SEGMENT INFORMATION AND SIGNIFICANT CUSTOMERS
The Company operates predominantly in one business segment, information
storage solutions, including external RAID subsystems. During the six months
ended June 30, 2000, no single customer accounted for greater than 10% of the
Company sales while during the six months ended June 30, 1999, one customer
accounted for 22% of the Company's sales.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
With the exception of discussion regarding historical information,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" contains forward looking statements. Such statements are based on
current expectations subject to uncertainties and other factors which may
involve known and unknown risks that could cause actual results of operations to
differ materially from those projected or implied. Further, certain forward
looking statements are based upon assumptions about future events which may not
prove to be accurate.
Risks and uncertainties inherent in forward looking statements include, but
are not limited to, our future cash flows and ability to obtain sufficient
financing, timing and volume of sales orders, level of gross margins and
operating expenses, lack of market acceptance of our new product lines, price
competition, conditions in the technology industry and the economy in general,
as well as legal proceedings. The economic risk associated with materials cost
fluctuations and inventory obsolescence is significant to us. The ability to
manage our inventories and deliver products to our customers through procurement
and utilization of component materials could have a significant impact on future
results of operations or financial condition. Historical results are not
necessarily indicative of the operating results for any future period.
Subsequent written and oral forward looking statements attributable to our
company or persons acting on our behalf are expressly qualified in their
entirety by cautionary statements in this Form 10-Q and in other reports filed
by our company with the Securities and Exchange Commission. The following
discussion should be read in conjunction with the Consolidated Financial
Statements and the Notes thereto included elsewhere in this filing.
Overview
We are a manufacturer and supplier of high-availability, high-performance
enterprise-class SAN solutions for the Windows NT, UNIX and Linux computer
operating systems. Designed for storage-intensive environments such as the
Internet or other mission-critical applications, our products include Fibre
Channel and SCSI RAID-ready solutions, non-RAID storage products, tape backup
products and advanced storage management software solutions. We market our
products through a direct sales force and a global network of resellers and
OEM's.
<PAGE>
Our activities in the information storage industry have evolved through
several acquisitions, the first of which occurred in June 1996 when we acquired
certain assets associated with the RAID business in Lake Mary, Florida, from
Seagate Peripherals, Inc. In December 1996, we acquired substantially all the
net assets of Parity Systems, Inc. In June and July 1999, we acquired
approximately 76% of the outstanding common stock of Andataco, Inc. located in
San Diego, California and in November 1999, we acquired the remaining 24% of
Andataco. In early 2000, we completed the consolidation of our Lake Mary
manufacturing operations into our San Diego facility and moved our corporate
headquarters to San Diego. As a result of the acquisition of Andataco, we
believe that period to period comparisons for the three and six months ended
June 30, 2000 may not be meaningful.
In January 2000, we completed the Borg Sale, consisting of the sale of certain
patented technology referred to as Adaptive RAID, for $7 million cash (net of
approximately $.5 million of transaction costs). We do not anticipate that
future revenues will be materially adversely affected as a result of this
transaction.
On January 19, 2000, we acquired substantially all of the assets of OneofUs
for an aggregate purchase price of $2.9 million, consisting of $.3 million cash
and 776,000 shares of our common stock with an aggregate value of $2.6 million
(based on the average of the closing prices of our common stock during the ten
(10) trading days ended January 19, 2000). OneofUs was a Taiwan-based,
privately-held designer of high performance Fibre Channel RAID controllers and
storage solutions for open systems and the SAN market.
Results of Operations
We reported a net loss of $2.9 million for the three months ended June 30,
2000 compared to a net loss of $3.9 million for the corresponding quarter in
1999. For the six months ended June 30, 2000, the net loss was $.2 million
compared to a $6.4 million net loss during the prior year's six month period.
The 2000 six month period included a $5.6 million gain on the Borg sale
recognized during the first quarter of 2000.
Sales
Net sales for the three and six months ended June 30, 2000 increased to $10.9
million and $23.4 million, respectively, from $9.4 million and $10.8 million for
the same periods in 1999, respectively, representing a 16% increase for the
quarter and more than a 100% increase for the six month period. This increase is
substantially the result of a full six months of sales during 2000 attributable
to the June 1999 Andataco acquisition while the 1999 periods included only one
month of Andataco sales. This increase has been partially offset by the
inability of one of our suppliers to deliver a key component for integration
into recently introduced products, resulting in delays in initial shipments of
those products until after the end of the current second quarter.
Cost of Sales/Gross Margins
Gross margins increased to 30% and 29% for the three and six months ended June
30, 2000, respectively, as compared to 13% and 12% for the same periods in 1999.
The increase in gross margins is primarily the result of the utilization of the
Andataco sales channels to market our products as well as economies of scale
attributable to the level of fixed costs inherent in our operations coupled with
higher sales revenues. In addition, certain fixed costs have been reduced by the
completion in March 2000 of the consolidation of our Florida manufacturing
<PAGE>
operations into our San Diego headquarters. During the six months ended in 1999,
gross margins were negatively impacted by a $.7 million provision for slow
moving inventory. Our gross margins are dependent, in part, on product mix which
fluctuates from time to time.
Operating Expenses
Selling, General and Administrative
Selling, general and administrative expenses were $4.2 million and $3.4
million for the three months ended June 30, 2000 and 1999, respectively, an
increase of 21%. Selling, general and administrative expenses for the six months
ended June 30, 2000 increased 78% or $3.8 million, from $4.9 million in 1999 to
$8.7 million in 2000. These increases are the result of the acquisition of
Andataco, the most significant of which is employee compensation and the related
benefits. We do not expect selling, general and administrative expenses to
increase significantly over the remainder of the fiscal year.
Research and Development
Research and development expenses for the three and six months ended June 30,
2000 increased 28% and 24%, respectively, to $.9 million and $1.5 million,
respectively, over the same periods in 1999, principally due to additional costs
incurred in connection with the introduction of several new products during the
2000 second quarter. We believe that considerable investments in research and
development will be required to remain competitive and expect that these
expenses will continue to increase in future periods.
Depreciation and Amortization
Depreciation and amortization for the three and six months ended June 30, 2000
was $1.1 million and $2.3 million, respectively, as compared to $.6 million and
$1 million for 1999, respectively. These increases were primarily due to the
additional amortization (over seven years) attributable to $14.7 million of
goodwill associated with the 1999 Andataco acquisition and $2.8 million of
goodwill associated with the January 2000 acquisition of the assets of OneofUs,
partially offset by reduced amortization resulting from the fourth quarter 1999
write-down of $4.6 million of goodwill related to our 1996 acquisition of Parity
Systems, Inc. The Parity goodwill was determined to have been impaired because
of our inability to generate future operating income from the assets acquired in
the Parity acquisition.
Other Income, net
Other income increased by $.3 million and $.2 million during the three and six
months ended June 30, 2000, respectively, primarily due to a cash settlement
received during June 2000.
Interest Expense
Interest expense for the three and six months ended June 30, 2000 decreased to
$.3 million and $.6 million, respectively, as compared to $.5 million and $.8
million in 1999, respectively, primarily as a result of satisfying indebtedness
of $6.6 million by issuing common stock ($5.5 million in December 1999 and $1
million in April 2000). This reduction was partially offset by interest
attributable to a $5.1 million note incurred in the Andataco acquisition in June
1999.
<PAGE>
Preferred Stock Dividends
During the three and six months ended June 30, 2000 and 1999, all classes of
our convertible preferred stock required cumulative dividends principally at 8%
per annum. Preferred stock dividends increased slightly during 2000 principally
due to the issuance of $8.7 million of preferred stock in June 1999, partially
offset by the conversion of $4.9 million of preferred stock to common stock
since December 1999. Dividends are expected to decrease over the remainder of
the fiscal year due to the automatic conversion in July 2000 of an additional $3
million of preferred stock into common stock (see Note 5 to Consolidated
Financial Statements).
During the three and six months ended June 30, 1999, we recorded $.2 million
and $.3 million, respectively, as an additional embedded dividend attributable
to: (1) the fair value at the date of grant of warrants issued in connection
with the sale of Series E convertible preferred stock (based on the
Black-Scholes option-pricing model) and (2) the beneficial conversion privilege
on Series A convertible preferred stock representing the difference between the
conversion price and the quoted market price of common stock at the date of
issuance.
Liquidity and Capital Resources
Consolidated Statements of Cash Flows
Operating Activities
Net cash used by operating activities amounted to $6.5 million and $7.3
million for the six months ended June 30, 2000 and 1999, respectively. The most
significant use of cash was our loss from operations (before changes in assets
and liabilities) of $3.5 million and $3.4 million, respectively. During 2000 and
1999, we used cash of $2.8 million and $.5 million, respectively, in the
reduction of accounts payable and other liabilities. Another significant use of
cash during 2000 was an increase in inventories in the amount of $1.5 million
(principally due to our investment in new products which have recently commenced
shipments) which was substantially offset by cash provided by net collections of
accounts receivable of $1.1 million. During 1999, cash was also used in the
increase of accounts receivable in the amount of $2.7 million, principally due
to the significant increase in our June 1999 sales.
Investing Activities
Net cash provided by investing activities was approximately $6.2 million for
the six months ended June 30, 2000, principally due to $7 million in net cash
proceeds from the Borg Sale. During 1999, cash used by investing activities of
$1.5 million was principally for the acquisition of Andataco in the amount of
$1.3 million.
Financing Activities
Net cash used in financing activities for the six months ended June 30, 2000
was $.2 million which consisted of the repayment of $1.7 million of borrowings
from Mr. Levy, principally offset by $1.2 million in proceeds from the exercise
of stock options and warrants. Net cash provided by financing activities for the
six months ended June 30, 1999 amounted to $8.9 million and primarily consisted
<PAGE>
of net borrowings of $4.3 million from private investors, including $1.5 million
from a company controlled by Mr. Levy which was satisfied by the issuance of
convertible preferred stock, $1.6 million in proceeds from the exercise of stock
options and warrants, $1 million from the issuance of common stock, and $2
million from the issuance of convertible preferred stock.
Borrowings
In connection with the acquisition of Andataco, we issued $5.1 million in
promissory notes due in July 2004. In addition, our asset based revolving Bank
Line of Credit (see Note 4 to Consolidated Financial Statements) provides for
borrowings based on the lesser of $10 million or (i) 85% of eligible accounts
receivable, as defined, plus (ii) the lesser of $1.75 million or 23% of eligible
inventory, as defined. This facility provides for certain financial covenants,
including tangible net worth requirements.
During 2000, we have not been in compliance with the minimum tangible net
worth covenant of the Bank Line of Credit, and, as a result, such line of credit
is in technical default. Effective March 29, 2000, the lender agreed to waive
the default related to the first quarter of 2000. Effective April 14, 2000, we
agreed with the lender to amend certain terms of the Bank Line of Credit
including an increase in the interest rate and new minimum net worth and net
income covenants on a consolidated basis. All other significant provisions of
the Bank Line of Credit are expected to remain the same. We are currently in
discussions with the lender to finalize this amendment.
Financing Activities With Private Investors
From late 1997 through June 30, 2000, we obtained net cash proceeds of $27
million from private investors, consisting of sales of convertible preferred
stock and common stock, net borrowings and the exercise of stock options and
warrants to purchase shares of our common stock. Of these amounts, Mr. Levy or
companies controlled by Mr. Levy advanced or invested a net amount of $7.4
million.
On January 10, 2000, we completed the Borg Sale and received net cash proceeds
of approximately $7 million, net of approximately $.5 million of transaction
costs, of which $1.6 million was used to repay short-term notes payable to Mr.
Levy. We do not anticipate that future revenues will be materially adversely
affected as a result of this transaction.
Effective April 12, 2000, Mr. Levy agreed to commit to us a $2 million
revolving line of credit facility (subsequently increased to $2.5 million
effective July 31, 2000) which matures on April 30, 2001, as revised. At June
30, 2000, net advances under this facility amounted to $550,000 ($650,000
advanced and $100,000 repaid) and bears interest at 10% per annum. On August 1,
2000, we borrowed an additional $500,000 under this commitment.
On May 9, 2000, we entered into an agreement with a private investment group
granting us a one-year $15 million equity line or equity draw down facility. The
agreement does not obligate us to draw any of the funds. Once per draw down
period, we may request a draw of up to $5 million, subject to a formula based on
average stock price and average trading volume, setting the maximum amount of
any request for any given draw. The amount of money that the investment group
will provide to us and the number of shares we will issue to the investment
group in return for that money is settled on a weekly basis during a 22 day
trading period following the draw request based on a formula as defined in the
stock purchase agreement. The investment group receives a 7% discount to the
<PAGE>
market price for the 22 day period and we receive the settled amount of the draw
down less a 4% fee payable to the placement agent. During June 2000, we issued
36,657 shares of common stock and received $98,000 pursuant to this agreement.
We believe that amounts expected to be available under the Bank Line of
Credit, Mr. Levy's commitment and our equity line will be sufficient to satisfy
our working capital needs during 2000, as presently contemplated. If we do not
finalize the amendment to our Bank Line of Credit, there can be no assurance
that we will be able to find a replacement lender with acceptable terms. In
addition, there can be no assurance that we may not require additional capital
beyond our current forecasted needs nor that any such additional required funds
would be available on terms acceptable to us, if at all, at such time or times
as required by us.
Effect of Inflation
Inflation has not had an impact on our operations and we do not expect that it
will have a material impact in 2000.
Year 2000 Issue
As many computer systems, software programs and other equipment with embedded
chips or processors (collectively referred to as Information Systems) use only
two digits rather than four to define the applicable year, they may be unable to
process accurately certain data, during or after the year 2000. As a result,
business and governmental entities are at risk for possible miscalculations or
systems failures causing disruptions in their business operations. This is
commonly known as the Year 2000 (Y2K) issue. The Y2K issue concerns not only
Information Systems used solely within a company but also concerns third
parties, such as customers, vendors and creditors, using Information Systems
that may interact with or affect a company's operations.
We have not experienced any material disruption in our business or operations
as a result of Y2K issues. However, there is no assurance that we will not
experience interruptions in the future.
Item 3. QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We maintain a floating interest rate Bank Line of Credit. Therefore, we are
subject to a certain amount of risk arising from increases to the prime rate.
<PAGE>
Part II - OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable
Item 2. Recent Sales of Unregistered Securities and Use of Proceeds
Effective April 26, 2000, we issued 296,296 shares of our common stock
in connection with the satisfaction of $1 million of borrowings.
Effective June 22, 2000, we issued 36,657 shares of our common stock
in connection with our equity line of credit.
All of the foregoing issuances were exempt from registration under
section 4(2) of the Act.
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
On June 5, 2000, the Company held its Annual Meeting of Stockholders. At
the meeting, the shareholders approved all matters considered with the following
vote distribution:
Item Affirmative Negative Withheld
Election of Board of Directors
Roger H. Felberbaum 31,378,466 - 36,577
Bernard R. Green 31,378,162 - 36,881
Larry Hemmerich 31,330,719 - 84,324
H. Irwin Levy 31,377,762 - 37,281
Michael L. Wise 31,377,466 - 37,577
Reappoint BDO Seidman, LLP as
independent auditors for
fiscal 2000 31,339,725 24,534 50,784
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits:
(27) Financial Data Schedule
(b) Reports on Form 8-K:
We were not required to file Form 8-K during the quarter for which this
report is filed.
<PAGE>
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
August 11, 2000 ---------------------------
Jack Jaiven
Principal Financial and
Accounting Officer
