SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
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SECURITIES AND EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
OR
_______ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number: 08354
nStor Technologies, Inc.
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(exact name of registrant as specified in its charter)
Delaware 95-2094565
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(State of Incorporation) (I.R.S. Employer ID No.)
10140 Mesa Rim Rd., San Diego, California 92121
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(Address of principal executive offices)
Registrant's telephone number, including area code: 858-453-9191
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.05 per share
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(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.[ ]
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AGGREGATE MARKET VALUE OF THE VOTING COMMON STOCK
HELD BY NONAFFILIATES OF THE REGISTRANT
Common Stock, par value $.05 per share ("Common Stock"), was the only class of
voting common equity of the Registrant outstanding on December 31, 1999. Based
on the last sales price of the Common Stock on the American Stock Exchange
("AMEX") on March 15, 2000 ($5.75), the aggregate market value of the
approximately 20,605,000 shares of the voting Common Stock held by
non-affiliates was approximately $118.5 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:
31,387,228 shares of Common Stock, par value $.05 per
share, were outstanding as of March 15, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
Definitive Proxy Statement of nStor Technologies, Inc.
for the 2000 Annual Meeting of Stockholders
(incorporated in Part III)
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PART I
Item 1. Business
GENERAL
nStor Technologies, Inc., through its operating subsidiaries, nStor Corporation,
Inc. and Andataco, Inc. (Andataco) is a manufacturer and supplier of
high-availability (ability to remain on line and accessible), high-performance
(ability to record and access data with the greatest amount of speed and
accuracy) Internet storage and customized Storage Area Network (SAN) solutions,
including external RAID (Redundant Array of Independent Disks) solutions, tape
backup products and advanced storage management software solutions. We were
incorporated as a Delaware corporation in 1959.
Our product line supports a variety of operating systems, including Microsoft
Windows NT, Novell NetWare, IBM OS/2, Mac, SCO UNIX, UnixWare, SGI IRIX, Sun
Solaris, and Linux. Our product line utilizes technology architectures
including; Fibre Channel, Ultra2 LVD (Low Voltage Differential), SCSI (Small
Computer Systems Interface), Ultra SCSI, and Ultra160 SCSI. Our RAID solutions
provide data storage solutions, particularly for applications requiring
substantial storage performance and capacity, such as document imaging, video
and multimedia, or transaction-intensive environments, such as banking and order
entry systems.
We market our products through a direct sales force in the United States and
through a global network of reseller and Original Equipment Manufacturer (OEM)
partners worldwide. With company-owned operations in the United States and Asia,
and strategic partners in Europe, Latin America, Canada and Australia, we are
well positioned to meet the demanding storage requirements of our global
customers.
On June 8, 1999, we purchased approximately 76% of the total issued and
outstanding common stock of Andataco from affiliates of W. David Sykes, the then
President of Andataco (Mr. Sykes), for $5.1 million, in the form of 9.5%
subordinated promissory notes, due in 2004. As part of the acquisition of
Andataco, we also acquired from Mr. Sykes a promissory note in the original
principal amount of $5.2 million payable by Andataco to Mr. Sykes. The purchase
price for the promissory note was: $.5 million in cash, 4,654 shares of our
Series F convertible preferred stock convertible into an aggregate of 1,551,333
shares of our common stock based on a conversion price of $3.00 per share, and
three year warrants to purchase an additional 155,133 shares of our common stock
for $3.30 per share.
On November 2, 1999, we acquired the remaining shares of Andataco common stock
by merging Andataco with a wholly owned subsidiary, which we organized for that
purpose. In the merger, we issued approximately 924,000 shares of our common
stock, with an aggregate value of $1,848,000, to the Andataco stockholders in
exchange for the remaining shares of Andataco common stock. The aggregate
consideration paid in the acquisition of 100% of Andataco totaled $14.4 million
representing $12.8 million in purchase consideration and $1.6 million in
transaction costs.
The acquisition of Andataco was accounted for using the purchase method of
accounting. As a result, we have included the results of operations of Andataco
beginning from the respective dates of acquisition. We believe that as a result
of the Andataco acquisition, the comparative financial information prior to the
Andataco acquisition may not be meaningful.
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Our executive and business headquarters are located at 10140 Mesa Rim Rd., San
Diego, California 92121 and our telephone number is (858) 453-9191. Our
principal engineering and marketing offices are located in Lake Mary, Florida.
Information regarding nStor can be accessed through the World Wide Web at
http:// www.nStor.com.
Recent Developments
On January 10, 2000, we sold substantially all of the assets of our wholly-owned
subsidiary, Borg Adaptive Technologies, including certain patented technology
referred to as Adaptive RAID, to a wholly owned subsidiary of QLogic
Corporation, for $7.5 million in cash and we expect to report a gain of
approximately $6.5 million during the first quarter of 2000. As part of the
sale, we retained a perpetual license in and to the Adaptive RAID technology. We
do not anticipate that future revenues will be materially affected as a result
of this transaction.
Effective January 17, 2000, Mr. Larry Hemmerich was appointed as our new
President and Chief Executive Officer and as a director. Mr. Hemmerich replaces
Lawrence F. Steffann who resigned as President and director effective January
14, 2000. From 1992 to 1997, Mr. Hemmerich served as Executive Vice President of
Data General and was responsible for the development and management of Data
General's Clariion computer storage division. Most recently, Mr. Hemmerich
served as General Manager of the Software and SAN Management Operation of
Hewlett-Packard's Enterprise Storage Business Unit.
On January 19, 2000, we acquired substantially all of the assets of OneofUs
Company Limited (OneofUs) for an aggregate purchase price of $2,850,000,
consisting of $250,000 cash and 776,000 shares of our common stock with an
aggregate value of $2,600,000 (based approximately on the average market price
of our stock during the ten (10) trading days ended January 19, 2000). The
shares were issued to three selling stockholders pursuant to employment
agreements and to a fourth selling stockholder in connection with a
confidentiality, noncompetition and nonsolicitation agreement. We agreed to
register the shares on a Registration Statement on Form S-3. OneofUs is a
Taiwan-based, privately-held designer of high performance Fibre Channel RAID
controllers and storage solutions for open systems and the SAN market.
INDUSTRY
During recent years, the demand for increased information storage capacity has
grown dramatically. Businesses today often rely on computing resources 7 days a
week, 24 hours a day. This increased demand for information has created a
growing market for companies that provide bundled or totally integrated storage
products and services. Fault-tolerant storage management plays a vital part in
protecting critical data in every aspect of the economy. The explosion of the
Internet/Intranet and the creation of millions of web sites worldwide has
accelerated this need for available, reliable data storage. The digital content
creation and multimedia industry, with its intense storage/retrieval
requirements, continually requires larger reliable storage systems, including
those used for photo retouching, video editing, graphic designers and graphic
animation products. Libraries, hospitals, law firms and government entities all
use document imaging to store millions of records each year and computer data
storage systems must accommodate search requests quickly and consistently.
According to DataQuest, a unit of Gartner Group, Inc. that provides global
market research and consulting services for the information technology industry,
forecasted storage revenues are expected to surpass $32 billion in 2000, growing
at 43 percent annually, while the SAN and Network Attached Storage (NAS)
segments are projected to grow 95 percent. DataQuest adds that the demand for
storage capacity in terabytes (TBs) will grow at a compounded annual rate of 81
percent through 2002.
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Much of this growth comes from the explosive growth associated with the
Internet/Intranet and the market's shift in strategic focus from a server
centric world to a storage centric world. The digital content creation and
multimedia industry, with its intense storage/retrieval requirements, also fuel
the demand for larger, more reliable storage solutions, including those used for
video/audio streaming, video editing, graphic design and animation. This sets
the stage for focused suppliers of SAN solutions to capture large segments of
this market.
Other factors contributing to the growth of the industry include: the rapid
adoption of Windows NT, migration of storage into larger disk arrays, and the
changing landscape in interface and connectivity of storage devices. Currently,
UNIX and Windows NT operating system platforms make up more than 80% of the
combined RAID revenue estimate. Although UNIX provides a larger installed base,
Strategic Research Corporation estimates that more than 80% of all networks have
mixed operating systems. The mixed operating system environment, coupled with
the rapidly changing storage architectures, supports the rapidly increasing
demand for Windows NT. Additionally, the strong growth rate in the Windows NT
operating system space has accelerated add-on purchases of external RAID
systems.
RAID technology is an effective tool to protect network computer users from the
loss of critical disk data. We believe that RAID subsystems will continue to
play a significant role as the preferred method for data storage in network
environments. We also believe that we are well positioned to provide
fault-tolerant information storage systems to many 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 we will be successful in these
efforts due to the possibility of increased competition, the development of
alternative technologies, and other factors.
RAID TECHNOLOGY
RAID, a concept developed in 1988 by a team of researchers from the University
of California at Berkeley, is an information storage technology consisting of
three or more disk drives working together as one, using proprietary hardware
and software to achieve extremely fast data transfer and Input/Output (I/O)
rates, high levels of redundancy and large storage capacities.
RAID subsystems are able to achieve faster data transfer rates than individual
disk drives because of their ability to spread data among all of the component
disk drives and retrieve data from all of the component disk drives
simultaneously at very fast speeds. They are also able to achieve faster I/O
rates than individual disk drives because of their ability to spread I/O's among
all of the component disk drives. (An I/O represents a user-requested read or
write (opening or saving) of data from the disk.)
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 system shut down). By
linking together multiple disk drives, RAID subsystems significantly enhance
storage capacities.
The recent proliferation of Internet, video and multimedia applications, coupled
with the continued installation of client/server-based networks, has placed
continuing demand on disk storage resources in terms of capacity, performance
and fault-tolerance. The RAID technology initially introduced in 1988 was
specifically designed to improve the performance and fault tolerance of
disk-based subsystems. The algorithms and features of "first-generation" RAID
products have been widely implemented. However, since its introduction, many of
the technology's initial shortcomings and limitations still exist, such as the
inability to adapt to I/O workload and dedicated RAID levels, complex system
configuration and performance tuning, performance limitations as a result of
writing in one of the RAID levels (RAID-5) and limited or no online capacity
expansion. With the forecasted growth in the demand for RAID products, we
believe a significant market opportunity exists for our "next-generation" RAID
products (see Current Product Offerings).
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We historically have been a provider of leading-edge storage products for the
Unix and Windows NT markets. Over the longer term, however, changing corporate
storage needs will require us to provide a more comprehensive set of solutions
than we offer today. We are moving from a product-specific background to a SAN
solution orientation that relies more heavily on its software components. The
SAN infrastructure we envision incorporates not only our storage hardware
products and complementary third-party peripherals, but also derives a
considerable portion of its value from nStor-developed software. We have begun
to develop these software components that we expect will facilitate integration
of both hardware components as well as functions such as backup and data
replication into a single SAN solution. However, there can be no assurance that
we will be successful in these efforts given the possibility of increased
competition, the development of alternative technologies, and other factors.
PRODUCTS
Product Strategy
Our current hardware products include both Fibre Channel and SCSI-based
solutions. The nStor-designed Fibre Channel products include SES-compliant (SCSI
Enclosure Services) enclosures that can hold up to 900 Gigabytes (GBs) (18 disk
drives) in a 4U (7") space, that are combined with our Fibre Channel RAID
controllers to become the NexStor storage solution family. We also engineer and
integrate a complete line of SCSI-based solutions that incorporates our
enclosure technology and are sold as either RAID-ready enclosures or complete
solutions integrated with third-party RAID controllers. Our software development
centers on AdminiStor, a web-based storage management software solution that is
used to configure RAID controllers, monitor and report enclosure status, and
manage disk arrays.
Designed to reduce the cost of computer system ownership, our external RAID
subsystems employ hot swap components, advanced cooling systems and redundant
N+1 architecture (N+1 Architecture) to improve data reliability and
availability. (N+1 Architecture requires the minimum number of components
installed to support the system plus one additional hard drive as a backup.) Hot
swap drives, power supplies and cooling fans eliminate single points of failure
within an individual storage device; keeping data online and available when
needed.
In April 2000 we announced the introduction of a new family of SAN storage
solutions including the NexStor 802F and the NexStor 3150. Both new products
have the capacity to hold eight disk drives in less than 3 1/2 inches (2U) of
data center rack space, making it what we believe to be the most compact
enterprise-level storage system on the market today.
The NexStor 802F accepts 1-inch or 1.6-inch Fibre Channel disk drives in a
compact 2U enclosure for standard 19-inch racks, yielding almost twice the
storage capacity in the same space as competitive alternatives. The NexStor
3150, a storage solution that integrates Fibre Channel RAID controllers within
the same enclosure utilizes additional 802F's for scalability and creates what
we believe to be the most compact fault-tolerant, SAN-ready enterprise storage
system on the market today. We are now accepting orders for the NexStor 802F,
with the first customer shipment planned by the end of the second quarter.
Current Product Offerings
In addition to nStor-developed products, a strategic reseller agreement with
EMC/Clariion allows our customers access to an expanded range of solutions. Our
line of high performance, high availability storage solutions includes:
NexStor. The NexStor family is our Fibre Channel product which consists of
combinations of our high-performance, active/active Fibre Channel RAID
controllers and NexStor Fibre Channel enclosures.
NexStor 2000/2050 - Fibre Channel RAID
The NexStor family features the performance benefits of Fibre Channel with the
ability to move data at up to 200MB/s (megabytes per second). This product is
available with either single (NexStor 2000) or dual (NexStor 2050) Fibre Channel
RAID controllers.
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NexStor 18F - JBOD
The NexStor 18F Fibre Channel JBOD (Just a Bunch of Disks) Storage Solution has
fault-tolerant features. In addition to Fibre Channel (200MB/s), the NexStor 18F
has dual-loop performance which produces a storage solution for
Internet/Intranet servers, on-line transaction processing, document imaging,
data warehousing and digital video and multimedia systems. The NexStor 18F
accommodates up to 18 Fibre Channel disk drives in a single 4U enclosure,
providing room for 900GB using currently available disk drive technology.
The NexStor 18F supports both a JBOD configuration or an optional single-loop or
dual-loop Fibre Channel RAID controller. Our NexStor 18F enclosure features a
cable-less, passive dual Fibre Channel Arbitrated Loop backplane (to which many
of the storage devices are connected) engineered to incrementally boost
performance and availability through a modular design. The air-plenum cooling
design provides support for 7,200 RPM (rotations per minute) and 10,000 RPM disk
drives, as well as support for the higher capacity 50GB disk drives. Other
system features include data transfer rates up to 200MB/s, support for up to 126
storage devices, dual power cords, support for cable lengths up to 30 meters
utilizing a copper interface or up to 10 kilometers utilizing fibre optics, and
redundant, hot-swappable disk drives, fans, power supplies and loop resiliency
circuits.
GigaRAID. Our GigaRAID family consists of mid-range active/active, highly
scalable solutions, as well as entry-level RAID solutions, based on SCSI
architecture. The GigaRAID/AA is suited for Internet, digital video/audio,
seismic and other application areas that need to scale up to 5TB in a single
data center, while the GigaRAID/LS is for entry-level environments that require
up to 1.2TB of fault-tolerant storage.
GigaRAID/AA - RAID
The GigaRAID/AA offers active/active RAID controllers for fault tolerance,
performance up to 80MB/s and the ability to scale up to 3TB. This product can be
used for large-block sequential applications and mission-critical environments.
The GigaRAID/AA is a high-performance RAID array that combines the
fault-tolerant benefits of RAID with proactive storage management. GigaRAID/AA
provides visual, audible and electronic alarms signaling potential system
failures allowing system administrators the opportunity to repair faulty
components before affecting critical business information. Providing capacities
of up to 1.08TB per base system, each GigaRAID/AA system includes single or
dual-active controllers and is available in deskside tower or rackmount
enclosures. GigaRAID/AA's microprocessor coupled with its cable-less chassis can
provide for a full range of application types, including imaging,
video-on-demand, bulk storage or on-line transactions.
GigaRAID/LS - RAID
Our GigaRAID/LS provides a cost-effective SCSI RAID solution that is scalable
from 9GB to 1.2TB in a single rackmount or deskside tower enclosure. It includes
a single Ultra2 LVD RAID controller that supports up to 128MB of battery-backed
cache for increased performance and data protection.
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The GigaRAID/LS is suited for the environments typically found in smaller
Internet Service Providers (ISPs), dedicated application servers, file servers,
digital video/audio delivery systems, as well as general technology users.
Each GigaRAID/LS module begins with up to eight 9GB, 18GB, 36GB or 50GB disk
drives. Expansion modules provide up to 1.2TB of high-performance storage.
GigaSTOR. Our GigaSTOR family consists of general-purpose storage products that
provide support for the Ultra2 LVD and Ultra160 SCSI products.
GigaSTOR/8000+ - RAID-Ready (JBOD)
The GigaSTOR/8000+ is a Ultra160 SCSI RAID-Ready storage solution which provides
transfer rates up to 160MB/s and is compatible with existing single-ended and
high voltage differential Host Bus Adapters (HBAs). The GigaSTOR/8000+ provides
performance in throughput-intensive environments such as digital video/audio
streaming and multi-node servers.
Administor. AdminiStor(R) 5.0 is the latest version of our Internet storage
solution software for storage configuration, management and monitoring.
Optimized for Application Service Providers (ASPs), ISPs, co-location and
e-commerce sites, AdminiStor 5.0 uses the power of the Internet to access
high-end storage solutions including SANs from anywhere in the world.
Backup. We offer a range of tape backup systems to complement our primary
storage solutions.
Technical Service. We offer a range of full-time service and support programs,
providing customers with a variety of on-site and help-desk plans.
SAN Solutions. We design and install SAN solutions. In addition to
nStor-developed storage products, we also offer SAN components such as switches
and routers that have been pre-tested and certified.
We are continuing development of Fibre Channel and SAN solutions as these
capabilities evolve into new standards. Since this is newer technology, we are
working closely with a select group of interoperability partners to develop
complete SAN solutions that incorporate compatible storage backup, replication
and networking capabilities.
As storage continues to proliferate, the space required to house that storage
becomes a premium. As a result, we are developing a variety of space-saving
systems that we expect will, using currently available disk drives, support up
to 600GB of storage within a 2U (3.50 inch) enclosure. As capacity in the 1-inch
disk drive family increases, more storage can fit within this small space.
We also anticipate that Fibre Channel, both from an interface as well as an
interconnect technology, will continue to rise in importance. We believe our
acquisition of OneofUs, and its associated Fibre Channel RAID controller product
line, strengthens our ability to provide a complete SAN solution. These
enhancements, combined with improvements to the AdminiStor storage management
software product and nStor-developed Fibre Channel storage subsystems, should
enable us to continue offering SAN solutions that meet the price/performance
requirements the market demands. However, there can be no assurance that we will
be successful in these efforts due to the possibility of increased competition,
the development of alternative technologies, and other factors.
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PROPRIETARY TECHNOLOGY
We rely upon patents, copyright and trademark protection, as well as
non-disclosure and confidentiality agreements with employees and customers, to
establish, protect and preserve our proprietary rights. We own the following
trademarks and copyrights:
nStorTM
AdminiStor(R)
GigaRAID(R)
Enterprise Storage Packaging(R)
RAID Lite(R)
RAPID-Tape(R)
Smart Cabinet(R)
StorViewTM
nTeraTM
nVantageTM
DirectStorTM
For the life of your data(R)
There can be no assurance that the steps taken to protect our rights will be
adequate to prevent misappropriation of our technology or to preclude
competitors from developing products with features similar to our products.
Although we believe our products and other proprietary rights do not infringe
the proprietary rights of others, there can be no assurance that, in the future,
third parties will not assert infringement claims against us or with respect to
our products for which we have indemnification obligations to certain of our
customers. Asserting our rights or defending against third-party claims could
involve substantial expense. In the event a third party were successful in a
claim that one of our products infringed the third party's proprietary rights,
we may have to pay substantial damages or royalties, remove that product from
the marketplace or expend substantial amounts in order to modify the product so
that it no longer infringes such proprietary rights, any of which could have a
material adverse effect on our business.
SALES AND MARKETING
We market our products and services through a direct sales force to users in the
United States and through a global network of reseller and OEM partners in
Europe, Asia, Latin America, Canada and Australia. We sell our products directly
to end users through our field sales organizations and indirectly through two
channels: (i) OEMs and (ii) volume channel, consisting of systems integrators,
technical distributors and value added resellers ("VARs").
Our direct sales to end users through our field sales organization was our
primary sales channel in 1999 representing over 80.6% of total sales. Our direct
sales organization is arranged by specific geographical territories, each being
assigned a regional manager, multiple district managers as well as an inside
account managers (ISAMs). To maximize our visibility within each territory,
regional and district managers are located within their respective territories
and are supported by corporate-based ISAMs. One direct sales customer, Intel
Corporation, accounted for 11% of net sales for 1999.
OEM-grade products are primarily sold directly to OEM server manufacturers for
integration into their product offerings. Generally, the OEM products are
labeled under the OEM's brand name. We believe the OEM channel provides
significant revenue opportunity, market visibility and credibility, and can
serve as a proving ground for new technologies that can later be marketed and
sold in the distribution channel. OEMs are strategic in nature and therefore
require unique sales strategies and support. OEM sales accounted for 19.4% of
our sales for the year ended December 31, 1999.
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One OEM customer, Silicon Graphics, Inc. (SGI) accounted for 15.1% of net sales
for 1999 and two OEM customers, Discreet Logic and Intergraph Corp., accounted
for 27% and 13%, respectively, of net sales for 1998 and 11% and 10%,
respectively, of net sales for 1997.
Our products are frequently packaged by our volume channel customers as part of
a complete data processing system or combined with other storage devices to
deliver a storage subsystem.
The sales model for product distribution in Europe, the Asia/Pacific-Rim and
Latin America is similar to the volume channel domestic model, utilizing systems
integrators, technical distributors and VARs.
Each sales channel is supported by complementary pricing and margin structures.
We believe this strategy allows us and our customers to effectively sell and
market our products across multiple channels while still maintaining channel
integrity.
Our sales organization sells directly to end users, recruits new OEM's,
distributors and resellers, supports existing resellers, markets products to
OEMs and system integrators and participates in trade shows.
Our marketing plan utilizes a variety of programs to promote and develop new and
expanding markets for our product line and to support the sales strategy. The
focal points of this plan include the supply of highly focused collateral
material including product specification literature and application notes, web
site innovation, development and promotion of the distribution channel,
strategic media placement, active regional, national and international tradeshow
participation, and aggressive public relations.
TECHNICAL SUPPORT AND CUSTOMER SERVICE
We provide support from order entry to post sales service through our enterprise
resource planning software. Products are tracked through each stage of
engineering, manufacturing and distribution for the entire life of a product,
and our customer service department can view the history of each individual
system.
We believe that our ability to provide prompt and reliable technical support has
enhanced our marketing efforts. We provide comprehensive customer and technical
support for all of our products through our technical and customer services
organization. A toll-free telephone number is provided for support to all OEM's,
volume channel partners (resellers and integrators) and end users.
Our standard warranty is a one-year return-to-factory policy which covers both
parts and labor. We pass on to the customer the warranty provided by the
manufacturers for products that we distribute and for drives and tapes used in
our products that are manufactured by a third party. We have not experienced
material warranty claims; however, there can be no assurance that future
warranty claims will not have a material adverse effect on our future operating
results. We also offer extended warranties (two, three and five years) and
on-site service for our products for a fee, including 24-hour service, seven
days a week or 9-hour service, five days a week, for which we contract primarily
with third-party service providers.
In addition, we offer a Depot Express program for certain of our products. Depot
Express provides for advance replacement of failed components. If our Help Desk
technical staff determines a replacement is necessary, we will ship a new
component by the next business day, based upon availability. This service is
available for a one-time fee at the time of the original purchase.
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We also offer an Incident Depot Express program for certain of our products.
Incident Depot Express provides expedited shipment for failed components on a
per-incident basis, based upon availability. This is a non-contracted service
and does not require a charge at the time of the original purchase. A fee is
charged only if a component fails and a replacement is shipped out.
MANUFACTURING AND SUPPLIERS
Our manufacturing operations are currently located in San Diego, California. In
December 1999, we began the process of transferring our manufacturing operations
from Lake Mary, Florida to San Diego, California. The transfer of manufacturing
operations was completed in early March 2000. Our products are assembled from
components and prefabricated parts, such as controllers, cabinets, multiple disk
drives and power supplies, manufactured and supplied by others. We work closely
with a group of regional, national and international suppliers, which are
carefully selected based on their ability to provide quality parts and
components that meet our specifications and volume requirements. A number of our
parts and components are not available off the shelf, and are specifically
designed by us for integration into our products.
We depend heavily on our suppliers to provide high quality materials on a timely
basis and at reasonable prices. Although many of the components for our products
are currently available from numerous sources at competitive prices, some of the
components used in our products are presently available from a limited number of
suppliers, or from a single supplier. Furthermore, because of increased industry
demand for many of those components, their manufacturers may, from time to time,
be unable to make delivery of orders on a timely basis. In addition,
manufacturers of components on which we rely may choose, for numerous reasons,
not to continue to make those components, or the next generation of those
components, available to us.
We have no long-term supply contracts. There can be no assurance that we will be
able to obtain, on a timely basis, all of the components we require. If we
cannot obtain essential components as required, we could be unable to meet
demand for our products, thereby materially adversely affecting our operating
results and allowing competitors to gain market share. In addition, scarcity of
such components could result in cost increases which could adversely affect our
operating results.
The sophisticated nature of our products requires extensive testing by skilled
personnel. We utilize specialized testing equipment and maintain an internal
test-engineering group to provide this product support.
BACKLOG
We manufacture our products based on a forecast of near-term demand and maintain
inventory in advance of receipt of firm orders from customers. Shipments are
generally made shortly after receipt of a firm order. We have no long-term
purchase commitments from our customers and, in general, customers may cancel or
reschedule orders on 30 days notice with little or no penalty. As a result, our
backlog at any given time is not necessarily indicative of future sales levels.
There can be no assurance that orders from existing customers will continue at
their historical levels, that we will be able to obtain orders from new
customers, or that existing customers will not develop their own storage
solutions internally and as a result reduce or eliminate purchases. Loss of one
or more of our principal customers, or cancellation or rescheduling of material
orders already placed, could materially and adversely affect our operating
results.
11
<PAGE>
RESEARCH AND DEVELOPMENT
We have three engineering centers to facilitate our product development
including our center in Taipei, Taiwan which we acquired from OneofUs in January
2000. Each of these centers of competency is focused on a different aspect of
our product development strategy.
Lake Mary, Florida is the competency center for our enclosure technology and
development. In addition to designing, developing and testing our storage
enclosures, engineers in Lake Mary are also responsible for the design,
development and successful integration of controllers (both nStor-developed
controllers as well as third-party products) into our enclosure technology.
San Diego, California is the competency center for our integrated solutions
including an extensive SAN integration lab. Engineers in San Diego integrate the
total SAN and general storage solutions that include nStor-created and third
party software and hardware components. The SAN interoperability lab focuses on
SAN component selection and validation, integration and delivery of end-user
solutions as well as solution testing for all our SAN-related products and
services.
Taipei, Taiwan is the competency center for the development of all our RAID
controller technology and Fibre Channel drive firmware qualification for these
controllers. The strategic location of this facility also provides access to the
engineering and manufacturing industrial complex in Asia for added resources.
The information storage industry is subject to rapid technological change. Our
ability to compete successfully is largely dependent upon the timely development
and introduction of products and our ability to anticipate and respond to
change. We use engineering design teams that work with marketing managers,
application engineers and customers to develop products and product
enhancements. Computer I/O interface standards are maintained and an extensive
disk drive qualification program is in place to monitor disk drives to ensure
the quality and performance of the disk drives integrated into our disk arrays.
As part of our development strategy, we actively seek industry leaders with whom
we can initiate co-development activities in the hardware, software and systems
businesses.
Aggregate research and development costs incurred were $3 million for the year
ended December 31, 1999, and $2.6 million for each of the years ended December
31, 1998 and 1997.
COMPETITION
The market for all levels of RAID subsystems is subject to intense competition.
We compete not only with other disk array manufacturers, but also with
manufacturers of proprietary, integrated computer systems and system integrators
which sell computer systems containing general purpose RAID subsystems, some of
which may have significantly greater financial and technological resources or
larger distribution capabilities than we do.
Certain competitors may offer their products at lower sales prices than we do;
accordingly, we must often compete on the basis of product quality, performance
and reliability in specific applications. Our continued ability to compete will
largely depend upon our ability to continue to develop high performance products
at competitive prices while continuing to provide superior technical support and
customer service.
12
<PAGE>
EMPLOYEES
As of February 29, 2000, we employed 165 full-time employees, of which 41 were
involved in engineering, product development and technical support, 59 in sales
and marketing, 38 in manufacturing and operations, and 27 in finance, management
and administration. Our employees are not covered by collective bargaining
agreements and there have been no work stoppages. We believe our employee
relations are good.
We also believe that our future success will largely depend upon our ability to
continue to attract, employ and retain competent qualified technical, marketing
and management personnel. Experienced personnel are in great demand and we must
compete with other technology firms, some of which may offer more favorable
economic incentives to attract qualified personnel.
Item 2. Properties
Our principal executive, administrative and sales activities are located in
approximately 42,400 square feet of facilities in San Diego, California. The
present annual base rent for our San Diego facility is $331,000. The space is
occupied under a lease agreement with an entity owned by Mr. Sykes, an officer
of the Company until March 6, 2000, after which date he was no longer affiliated
with the Company. The lease expires in March 2003.
We lease approximately 40,000 square feet of office and warehouse space in Lake
Mary, Florida, under lease agreements for 22,000 square feet and 18,000 square
feet, which expire in April 2000 and February 2002, respectively, at present
annual base rents of approximately $149,000 and $119,000, respectively. The
Company does not plan to renew the lease agreement for 22,000 square feet, which
expires in April 2000.
We distribute products through a network of 12 sales offices worldwide. We
believe the existing facilities are adequate to meet future needs. See Note 12
of the Notes to Consolidated Financial Statements for information regarding the
Company's obligations under its facilities leases.
Item 3. Legal Proceedings
In June 1996, Jack Ehrenhuas, Mark Schindler, Eugene Stricker, Amnon Damty, Ehud
Mendelson and Susan Felton filed a Complaint in the Supreme Court of the State
of New York, County of Nassau, against us and Michael Wise, our then Chairman of
the Board and a current director. The plaintiffs claim to have contractual and
proprietary interests in the prospect of a transaction to purchase certain net
assets acquired by us and seek compensatory damages plus punitive damages.
In August 1996, The Nais Corporation, Mark Schindler, Eugene Stricker, Amnon
Damty, Ehud Mendelson and Susan Felton filed a Complaint in the same Court
making similar allegations against one of our subsidiaries, its then president,
R. Daniel Smith ("Mr. Smith"), and a company controlled by Mr. Smith. In this
action, the plaintiffs seek compensatory damages plus punitive damages for
alleged breach of contract.
Both cases are currently in discovery. Our counsel believes that we have good
defenses to both claims and that we will not incur any material liability. We
are unaware of any facts that would support any of the plaintiffs' claims and,
accordingly, we believe that the claims are without merit.
From time to time, we are subject to legal proceedings and other claims arising
in the ordinary course of business. In our opinion, we are not a party to any
litigation the outcome of which would have a material adverse effect on our
business or operations.
13
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
The information required by this item is included under Item 4 in our Form 10-Q
dated November 15, 1999 and is incorporated herein by reference.
PART II
Item 5. Market for Our Common Equity and Related Stockholder Matters
Our common stock is traded on the American Stock Exchange (AMEX) under the
symbol NSO. The following table sets forth the high and low sales prices of our
common stock for each quarter during the years ended December 31, 1999 and 1998
as reported by AMEX. During that period, we did not pay any dividends on our
common stock and we do not expect to pay any dividends in the near future.
Market Price Range
--------------------
1999 High Low
---- -------- --------
First quarter 3-15/16 2
Second quarter 3-1/2 2
Third quarter 3 1-15/16
Fourth quarter 4-1/2 1-9/16
1998
First quarter 2-1/16 1-9/16
Second quarter 1-9/16 1
Third quarter 7/8 3/8
Fourth quarter 2-5/8 7/16
As of March 15, 2000, we had 31,387,228 shares of common stock
outstanding and approximately 1,782 holders of record of such stock.
Recent Sales of Unregistered Securities and Use of Proceeds
On March 30, 1999, we issued 645,000 shares of our common stock (including
395,000 shares to Mr. H. Irwin Levy, the Chairman of the Board of Directors and
a major shareholder (Mr. Levy), in satisfaction of approximately $1.3 million of
long-term debt.
In April 1999, we issued 500,000 shares of our common stock and a warrant to
purchase an aggregate of 250,000 shares of our common stock at a price of $2.00
per share for $1 million in cash to one private investor.
On June 8, 1999, we issued 3,500 shares of Series E Convertible Preferred Stock,
of which 1,500 shares were in satisfaction of $1.5 million of borrowings from
Mr. Levy, and three-year warrants to purchase an aggregate of 116,667 shares
(including 50,000 shares to Mr. Levy) of our common stock at a price of $3.30
per share. Issued to three private investors, the Series E Convertible Preferred
Stock, with a stated value of $1,000 per share, requires quarterly dividends at
the following annual rates: 8% during the first year, 9% during the second year
and 10% thereafter, and is convertible into shares of our common stock based on
a fixed conversion price of $3.00 per common share.
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<PAGE>
As part of the acquisition of Andataco, we issued 4,654 shares of Series F
Convertible Preferred Stock to Mr. Sykes, the then President of Andataco. The
shares of Series F Convertible Preferred Stock, with a stated value of $1,000
per share, are convertible into shares of our common stock based on a fixed
conversion price of $3.00 per common share. The Series F Convertible Preferred
Stock requires quarterly dividends at the following annual rates: 8% during the
first year, 9% during the second year and 10% thereafter.
In December 1999, we issued 1,878,462 shares of our common stock in full
satisfaction of approximately $5.5 million of notes payable. As a result of this
settlement, we recognized a $.5 million extraordinary loss from debt
extinguishment.
All of the foregoing issuances were exempt from registration under Section 4(2)
of the Act.
Item 6. Selected Financial Data
(dollars in thousands, except per share data)
The following table summarizes certain selected consolidated financial data for
the years ended December 31, 1999, 1998 and 1997, for the two month transition
period ended December 31, 1996, and for the years ended October 31, 1996 and
1995. In November 1996, we changed our fiscal year from October 31 to December
31, effective with the calendar year beginning January 1, 1997.
Certain amounts for years prior to fiscal 1999 have been reclassified to conform
to the 1999 presentation. These reclassifications had no impact on operating
results previously reported. The selected financial data has been derived from
our audited consolidated financial statements and is qualified by reference to,
and should be read in conjunction with, the Consolidated Financial Statements
and Notes thereto and "Management's Discussion and Analysis of Financial
Condition and Results of Operations", included elsewhere in this report:
<TABLE>
<CAPTION>
Two Months
Year Ended December 31, Ended Year Ended October 31,
-------------------------------- December 31, ----------- ----------
1999(1) 1998 1997 1996 1996(4) 1995(4)
-------- --------- --------- ------------ --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Sales $41,089 $18,026 $26,244 $4,739 $5,619 -
Gross profit 9,763 2,768 4,783 1,348 2,072 -
(Loss) income from operations (16,501)(2) (9,491) (7,521) (105) 115 -
Net (loss) income (18,704)(3) (10,407) (7,886) (43) 12,798 (61)
Net (loss) income available
to common stock (19,938) (11,888) (7,886) (43) 12,798 (61)
Basic and diluted net (loss)
income per common share (.89) (.63) (.42) (.00) .73 (.00)
Average number of common
shares outstanding 22,505,084 18,888,911 18,670,477 18,670,477 17,606,477 17,600,477
At end of period:
Total assets 34,041 14,128 16,762 20,067 15,677 12,054
Long-term debt 6,329 5,305 1,504 516 510 476
Shareholders' equity 6,273 3,150 5,037 12,817 12,390 10,932
</TABLE>
- ----------
(1) Includes results of operations of Andataco beginning June 1999, as a result
of the acquisition of Andataco, which was accounted for using the purchase
method of accounting.
(2) Includes charge of $6.4 million related to a write-off of unamortized
goodwill attributable to an acquisition completed in 1996, a write-off of
obsolete inventory and employment termination costs.
(3) Includes extraordinary loss of $.5 million ($.02 per basic and diluted
share).
(4) In 1995 and through June 1996, our only assets consisted of securities
received in 1992 in exchange for substantially all of our operating assets.
During that period, our only activities consisted of monitoring those securities
and evaluating potential business opportunities. The 1996 net income principally
consists of a $12 million gain from the sale of those securities and also
includes an extraordinary gain of $.6 million ($.03 per basic and diluted
share).
15
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
------------------------------------------------------------------------
Forward Looking Statements
With the exception of the discussion regarding historical information,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and other discussions elsewhere in this Form 10-K contain forward
looking statements. Such statements are based on current expectations subject to
uncertainties and other factors which may involve known and unknown risks that
could cause actual results of operations to differ materially from those
projected or implied. Further, certain forward-looking statements are based upon
assumptions about future events which may not prove to be accurate.
Risks and uncertainties inherent in forward looking statements include, but are
not limited to, our future cash flows and ability to obtain sufficient
financing, timing and volume of sales orders, level of gross margins and
operating expenses, lack of market acceptance or demand for our new product
lines, price competition, conditions in the technology industry and the economy
in general, as well as legal proceedings. The economic risk associated with
materials cost fluctuations and inventory obsolescence is significant to our
company. The ability to manage our inventories through procurement and
utilization of component materials could have a significant impact on future
results of operations or financial condition. Historical results are not
necessarily indicative of the operating results for any future period.
Subsequent written and oral forward looking statements attributable to us or
persons acting on our behalf are expressly qualified in their entirety by
cautionary statements in this Form 10-K and in other reports we filed with the
Securities and Exchange Commission. The following discussion should be read in
conjunction with the Consolidated Financial Statements and the Notes thereto
included elsewhere in this filing.
Overview
We are a manufacturer and supplier of high-availability, high-performance
Internet storage and customized SAN solutions, including external RAID
solutions, tape backup products and advanced storage management software
solutions for a variety of operating systems including, UNIX, Windows NT and
Linux.
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 and in November 1999, we acquired the
remaining 24% of Andataco. As a result of the acquisition of Andataco, we
believe that period to period comparisons for the year ended December 31, 1999
may not be meaningful. In addition, due to the fact that Andataco's operating
results were not included in our consolidated financial statements until June
1999, we expect that many of the components of our future operating results will
increase significantly in fiscal 2000.
In January, 2000, we sold substantially all of the assets of a wholly-owned
subsidiary which we had acquired in April 1998, including certain patented
technology referred to as Adaptive RAID, to a wholly-owned subsidiary of QLogic
Corporation for $7.5 million. We do not anticipate that future revenues will be
materially affected as a result of this transaction.
16
<PAGE>
Results of Operations
The following table sets forth certain operating data as a percentage of sales.
Year Ended December 31,
------------------------------
1999 1998 1997
---- ---- ----
Sales ...................................... 100% 100% 100%
Cost of sales .............................. 76 85 82
---- ---- ----
Gross profit ............................... 24 15 18
Selling, general and
administrative ........................... 37 46 34
Research and
development .............................. 7 14 10
Depreciation and
amortization ............................. 8 8 3
Write-down of Goodwill ..................... 11 -- --
---- ---- ----
Loss from operations ....................... (39) (53) (29)
Interest expense and other, net ............ 4 5 --
---- ---- ----
Loss before extraordinary item ............. (43) (58) (29)
Extraordinary loss from debt
extinguishment ........................... 1 -- --
----- ----- ----
Net loss ................................... (44%) (58%) (29%)
===== ===== ====
Comparison of Fiscal Years Ended December 31, 1999 and December 31, 1998
We reported a net loss of $18.7 million for the year ended December 31, 1999 as
compared to net loss of $10.4 million for the year ended December 31, 1998.
Results of operations for fiscal 1999 included an extraordinary loss of $.5
million on extinguishment of debt (see Note 6 to Consolidated Financial
Statements).
Sales
Sales for the year ended December 31, 1999 were $41.1 million as compared to $18
million during the preceding year, an increase of $23.1 million or 128%. The
primary factor for the increase was the acquisition of Andataco in June 1999,
partially offset by delays in the market introduction of certain new generation
products and our elimination of non-storage related businesses, including memory
and integrated systems divisions (approximately $2.1 million in 1998).
During the second quarter of 1999, we entered into an OEM agreement to supply
high-performance RAID storage enclosures to SGI, a major server manufacturer.
The initial term of the arrangement was expected to be for three years. Between
May and October 1999, sales to SGI totaled approximately $6 million. In the
third quarter of 1999, SGI made the decision to phase out their Windows NT
product to which our storage systems were attached. As a direct result, actual
shipments to SGI subsequent to October 1999 have been minimal and are not
expected to increase in the near future. SGI accounted for 15% of our net sales
for 1999. Two OEM customers, Discrete Logic and Intergraph Corp., accounted for
27% and 13%, respectively, of 1998 net sales.
17
<PAGE>
Cost of Sales/Gross Profit
Gross profit for the year ended December 31, 1999 increased to 24% from 15% for
the year ended December 31, 1998. Contributing to the improved gross margins
were the Andataco product sales and the utilization of Andataco's sales channels
to market our products. Our gross margins are dependent, in part, on dynamic
market pricing and on product mix which fluctuate from time to time.
Selling, General and Administrative Expenses
Selling, general and administrative costs for the year ended December 31, 1999
increased to $15.3 million (37% of sales) from $8.3 million (46% of sales) for
the year ended December 31, 1998. This increase is primarily the result of the
acquisition of Andataco, which was partially offset by a reduction in operating
expenses at our Lake Mary location. The reduction in expenses at that location
is primarily attributable to the elimination of expenses associated with the
integrated system division which was sold in October 1998. The most significant
increase in 1999 expenses resulted from compensation and related benefits of
additional employees brought about by the acquisition of Andataco.
Research and Development
Research and development expenses for the year ended December 31, 1999 amounted
to $3 million, representing 7% of sales as compared to the year ended December
31, 1998 when expenses were $2.6 million or 14% of sales. During January 2000,
we sold substantially all of the assets of our Borg Adaptive Technologies
subsidiary, which had contributed $.8 million and $.6 million to our research
and development expenses during 1999 and 1998, respectively. Decreases in
research and development expenses in 2000 as a result of this sale, however, are
expected to be partially offset by additional investments in research and
development which we believe will be required to remain competitive.
Research and development costs are expensed as incurred and may fluctuate
considerably from time to time depending on a variety of factors. These costs
are substantially incurred in advance of related revenues, or in certain
situations, may not result in generating revenues.
Depreciation and Amortization / Write-down of Goodwill
Depreciation and amortization increased to $3.4 million for the year ended
December 31, 1999 from $1.4 million for the year ended December 31, 1998,
principally due to the acquisition of Andataco, which added $1.1 million of
amortization of goodwill and $.8 million of depreciation in 1999.
During the fourth quarter of 1999 (see Note 15 to Consolidated Financial
Statements), we recorded a goodwill write-down of approximately $4.6 million.
This write-down eliminated all remaining unamortized goodwill related to the
1996 acquisition of Parity Systems, Inc (Parity). The Parity goodwill was
determined to have been impaired because of the Company's inability to generate
future operating income from the assets acquired in the Parity acquisition.
Interest Expense
Interest expense in 1999 increased $1.1 million over 1998 as a result of the
acquisition of Andataco which significantly increased our net average borrowings
(see Note 5 to Consolidated Financial Statements).
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<PAGE>
Income Taxes
We have recorded a 100% valuation allowance for deferred tax assets which, more
likely than not, will not be realized based on recent operating results.
Preferred Stock Dividends
EITF 98-5 addresses accounting for preferred stock which is convertible into
common stock at a discount from the market rate at the date of issuance. In
accordance with this EITF a preferred stock dividend attributable to such a
beneficial conversion privilege should be recorded for the difference between
the conversion price and the quoted market price of common stock at the date of
issuance. Accordingly, during 1999 we recorded $.3 million as an embedded
dividend attributable to the beneficial conversion privilege of certain classes
of our convertible preferred stock as compared to $1.2 million in 1998 (see Note
9 to Consolidated Financial Statements).
In addition, for the year ended December 31, 1999, all classes of our
convertible preferred stock required cumulative dividends at 8% and aggregated
$.9 million as compared to $.3 million in 1998. The increase was principally due
to additional issuances of preferred stock in 1999.
Comparison of Fiscal Years Ended December 31, 1998 and December 31, 1997
We reported a net loss of $10.4 million for the year ended December 31, 1998 as
compared to a net loss of $7.9 million from the year ended December 31, 1997.
Sales
Sales for the year ended December 31, 1998 were $18 million as compared to $26.2
million during the preceding year, a decrease of $8.2 million or 31%. Factors
contributing to this sales decline included: (i) delays in customer deliveries
and in some cases, missed sales orders in early 1998, caused by our inability to
meet customer production schedules brought about by our cash flow difficulties
at that time; (ii) lost sales opportunities while reorganizing and training our
sales force under new executive sales management; and (iii) entering 1998 with a
significantly lower balance of sales orders than were in place as of the
beginning of 1997. Another significant factor was a $3.8 million decrease in
non-storage related product sales, including memory products and enterprise
resource planning manufacturing software, as a result of our decision to phase
out our non-storage related businesses.
Cost of Sales/Gross Profit
Gross profit decreased to 15% for the year ended December 31, 1998,as compared
to 18% for the previous year. Our gross profit is dependent, in part, on product
mix which fluctuates from time to time. The decline in gross profit is primarily
due to a decreased sales level of products with overall higher margins and
certain cash flow difficulties which limited our ability to purchase products in
the most cost efficient manner. Excluding additions to inventory reserves, the
overall gross profit for 1998 would have been 23% as compared to 24% for 1997.
19
<PAGE>
Operating Expenses
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $8.3 million (46% of sales)
and $8.9 million (34% of sales) for the years ended December 31, 1998 and 1997,
respectively. The $.6 million decrease is principally attributable to overall
reduced spending levels resulting from planned cost reductions, primarily
advertising and travel, which were implemented as a result of the lower sales
levels. Selling, general and administrative costs as a percentage of sales
increased 12% during 1998 principally attributable to the level of certain fixed
costs we incurred while sales levels declined.
Research and Development
Research and development expenses were $2.6 million for the year ended December
31, 1998 and remained relatively unchanged from the preceding year. Certain of
these expenses decreased as a result of the continued integration of previously
acquired engineering activities. This decrease was offset by increased
engineering staffing and related overhead of $.6 million resulting from the
acquisition in April 1998 of Borg Adaptive Technologies, and increased project
costs in connection with the development of new products.
Research and development costs are expensed as incurred and may fluctuate
considerably from time to time depending on a variety of factors. These costs
are substantially incurred in advance of related sales, or in certain
situations, may not ultimately generate sales.
Depreciation and Amortization
Depreciation and amortization increased $.6 million for the year ended December
31, 1998 as compared to 1997, primarily due to additions to test equipment and
computer software.
Interest Expense
Interest expense in 1998 increased $.7 million over 1997 as a result of a
significant increase in net average borrowings and the amortization of loan
costs in connection with certain indebtedness.
Income Taxes
We have recorded a 100% valuation allowance for deferred tax assets which, more
likely than not, will not be realized based on recent operating results.
Preferred Stock Dividends
During 1998 we recorded $1.2 million as an embedded dividend attributable to the
beneficial conversion privilege of certain of our preferred stock. In addition,
for the year ended December 31, 1998, all classes of our convertible preferred
stock required cumulative dividends at 8% and aggregated $.3 million. There was
no preferred stock outstanding in 1997.
20
<PAGE>
Liquidity and Capital Resources
Consolidated Statements of Cash Flows
Operating Activities
Net cash used by operating activities amounted to $5.3 million and $10.5 million
for the years ended December 31, 1999 and 1998, respectively. The most
significant use of cash for both fiscal years was our loss from operations
(before depreciation, amortization and other non-cash items as well as changes
in assets and liabilities) of $8.2 million in 1999 and $6.7 million in 1998. The
1999 loss from operations was partially offset by a $1.5 million decrease in
inventories and a $.6 million decrease in accounts receivable. In 1998, net cash
used by operating activities also reflected a $3.5 million decrease in accounts
payable and other liabilities and a $.8 million increase in inventories.
Investing Activities
Net cash used by investing activities for the years ended December 31, 1999 and
1998 amounted to $2.1 million and $.8 million. Cash used by investing activities
for acquisitions totaled $1.4 million and $.4 million during 1999 and 1998,
respectively. Cash used for purchases of property and equipment was $.8 million
and $.5 million during 1999 and 1998, respectively.
Financing Activities
Net cash provided by financing activities for 1999 amounted to $7.9 million, and
primarily consisted of net borrowings of $3.3 million, $2.0 million from the
issuance of convertible preferred stock, $1.0 million from the issuance of
common stock and $2.5 million from the exercise of stock options and warrants.
Net cash provided by financing activities for 1998 amounted to $11.4 million,
principally consisting of $5.9 million in net borrowings, $3.5 million from the
issuance of convertible preferred stock (net of redemption) and $1.7 million
from the exercise of stock options and warrants.
Asset Based Credit Facilities
Andataco Revolver
The Andataco Revolver 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 Andataco Revolver
currently bears interest at prime plus 1/2 percent (9.0% at December 31, 1999)
and matures in April 2002. We pay a facility fee of .25% based on the average
unused portion of the maximum borrowings. Advances under the Andataco Revolver
are collateralized by substantially all assets of Andataco. The Andataco
Revolver provides for certain financial covenants, including Andataco
maintaining a certain minimum tangible net worth. During the second quarter
ended June 30, 1999, Andataco was not in compliance with that financial
covenant; however, effective July 13, 1999, the lender agreed to waive the
default, subject to, among other things, receipt from nStor of a $.5 million
capital contribution. On July 16, 1999, nStor contributed $.5 million in cash as
a capital contribution to Andataco. As of December 31, 1999, the outstanding
balance under this credit facility was $5.1 million and an additional $.2
million was available based on eligible collateral.
At February 29, 2000 and March 31, 2000, Andataco was not in compliance with the
minimum tangible net worth covenant of the Andataco Revolver. Effective March
29, 2000, the lender agreed to waive the default for both periods. Effective
April 14, 2000 we have agreed with the lender to amend certain terms of the
Andataco Revolver including the following: a change in the borrower from
Andataco to nStor Corporation, Inc., another wholly owned subsidiary; an
increase in the interest rate to prime plus 1.5%; and new minimum net worth and
net income covenants on a consolidated basis. All other significant provisions
of the Andataco Revolver are the same.
Effective April 12, 2000, Mr. Levy agreed to commit to a $2 million revolving
line of credit facility to us, which bears interest at 10% per annum. The
maturity date on this line of credit is the earlier of April 30, 2001 or when we
execute our amended Andataco Revolver.
nStor Revolver
In January 2000, we paid off the outstanding balance and terminated the nStor
revolving line of credit agreement (nStor Revolver). During fiscal 1999, the
nStor Revolver provided for borrowings based on the lesser of $5 million or 80%
of eligible accounts receivable, as defined. Interest was paid based on prime
plus 2%. Advances under the nStor Revolver were collateralized by substantially
all of our assets (excluding those of Andataco), including $.5 million reflected
as Restricted Cash as of December 31, 1998. The balance under the nStor Revolver
as of December 1999 was $10,000.
21
<PAGE>
Financing Activities
From late 1997 through December 31, 1999, we obtained net cash proceeds of
approximately $25.2 million (including $11.7 million during the year ended
December 31, 1999) from private investors, consisting of sales of convertible
preferred stock and common stock, net borrowings and the exercise of warrants
and options to purchase shares of our common stock. Of these amounts, Mr. Levy
or a company controlled by Mr. Levy had advanced or invested a net amount of
$8.4 million.
In December 1999, we issued 1,878,462 shares of our common stock in full
satisfaction of $5.5 million of notes payable. As a result of this settlement,
we recognized a $.5 million extraordinary loss from debt extinguishment.
On January 10, 2000, we sold substantially all of the assets of our wholly-owned
subsidiary, Borg Adaptive Technologies, including our patented Adaptive RAID
technology, to a wholly-owned subsidiary of QLogic Corporation. We received net
cash proceeds of approximately $7 million, net of approximately $.5 million of
transactions costs, of which $1.6 million was used to repay short-term notes
payable to Mr. Levy. As part of the sale, we retained a perpetual license in and
to the Adaptive RAID technology. We do not anticipate that future revenues will
be materially affected as a result of this transaction.
We believe that amounts expected to be available under the Andataco Revolver and
our available cash balances, principally as a result of the Borg sale, will be
sufficient to satisfy our working capital needs during 2000, as presently
contemplated. 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
During recent years, inflation has not had an impact on the our operations and
we do not expect that it will have a material impact in 1999.
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.
22
<PAGE>
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
Our exposure to market risk for changes in interest rates relates primarily to
our long-term debt obligations.
<PAGE>
Item 8. Financial Statements and Supplementary Data
Table of Contents to Consolidated Financial Statements
Page
Report of Independent Certified Public Accountants 26
Consolidated Financial Statements:
Balance sheets - December 31, 1999 and 1998 27
Statements of Operations - Year Ended
December 31, 1999, 1998 and 1997 28
Statements of Shareholders' Equity - Year Ended
December 31, 1999, 1998 and 1997 29-30
Statements of Cash Flows - Year Ended
December 31, 1999, 1998 and 1997 31-32
Notes to Consolidated Financial Statements 33-50
Report of Independent Certified Public Accountants 51
FINANCIAL STATEMENT SCHEDULES. The following financial statement schedules of
nStor Technologies, Inc. for the years ended December 31, 1999, 1998 and 1997
are filed as part of this Report on the page number so indicated and should be
read in conjunction with the Consolidated Financial Statements of nStor
Technologies, Inc.:
Schedule I - Condensed Financial Information of Registrant 52-54
Schedule II - Valuation and Qualifying Accounts 55
Schedules not listed above are omitted because they are not applicable or are
not required or the information required to be set forth therein is included in
the Consolidated Financial Statements or Notes thereto.
23
<PAGE>
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 December 31, 1999 and 1998 and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1999. 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 December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999 in conformity with generally accepted accounting principles.
BDO SEIDMAN, LLP
Costa Mesa, California
February 21, 2000, except
as to the last two paragraphs
of Note 14, which are as of
April 14, 2000
24
<PAGE>
nSTOR TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
=========================================
(dollars in thousands)
December 31,
-----------------
ASSETS 1999 1998
------ ------- -------
Current assets:
Cash and cash equivalents:
Restricted ........................................... $ 23 $ 21
Unrestricted ......................................... 650 147
Accounts receivable .................................... 7,326 2,462
Inventories ............................................ 6,288 3,028
Prepaid expenses and other ............................. 1,614 364
------- -------
Total current assets ............................. 15,901 6,022
Restricted cash and other non current assets ............. 131 500
Property and equipment, net of $2,932 and
$1,252 in accumulated depreciation ..................... 3,476 1,653
Goodwill and other intangible assets, net of
$1,311 and $939 in accumulated amortization ............ 14,533 5,953
------- -------
$34,041 $14,128
LIABILITIES ======= =======
-----------
Current liabilities:
Bank lines of credit ................................... $ 5,111 $ --
Director loans ......................................... 1,585 300
Convertible notes ...................................... 629 --
Other borrowings ....................................... -- 200
Accounts payable and other ............................. 14,114 3,435
------- -------
Total current liabilities ........................ 21,439 3,935
Long-Term liabilities:
Acquisition notes ...................................... 5,100 --
Notes payable .......................................... 1,229 4,713
Bank line of credit..................................... -- 1,738
Convertible notes ...................................... -- 592
------- -------
Total liabilities ................................ 27,768 10,978
------- -------
Commitments, contingencies and subsequent events
SHAREHOLDERS' EQUITY
--------------------
Preferred stock, $.01 par; 1,000,000 shares authorized,
in order of preference:
Convertible Preferred Stock; Series F, 4,054 and 0
issued and outstanding as of December 31, 1999 and
1998, respectively, aggregate liquidation value
$4,054; Series A, 1,667 issued and outstanding,
aggregate liquidation value $1,000; Series C, 3,000
issued and outstanding, aggregate liquidation value
$3,000; Series D, 2,700 issued and outstanding,
aggregate liquidation value $2,700; Series E, 3,500
and 0 issued and outstanding as of December 31, 1999
and 1998,respectively, liquidation value $3,500 -- --
Common stock, $.05 par; 75,000,000 shares
authorized; 26,517,824 and 20,515,425
shares issued and outstanding at December 31, 1999
and December 31, 1998, respectively ............... 1,331 1,025
Additional paid-in capital ......................... 63,164 40,409
Accumulated deficit ................................ (58,222) (38,284)
-------- -------
Total shareholders' equity ................. 6,273 3,150
-------- -------
$ 34,041 $14,128
======== =======
See accompanying notes to consolidated financial statements.
25
<PAGE>
nSTOR TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
=========================================
(dollars in thousands, except per share data)
Year Ended December 31,
-----------------------------
1999 1998 1997
-------- -------- --------
Sales ......................................... $ 41,089 $ 18,026 $ 26,244
Cost of sales ................................. 31,326 15,258 21,461
-------- -------- --------
Gross profit ............................. 9,763 2,768 4,783
-------- -------- --------
Operating expenses:
Selling, general and administrative ......... 15,340 8,335 8,909
Research and development .................... 2,981 2,572 2,618
Depreciation and amortization ............... 3,355 1,352 777
Write-down of goodwill ...................... 4,588 -- --
-------- -------- --------
Total operating expenses ...................... 26,264 12,259 12,304
-------- -------- --------
Loss from operations .......................... (16,501) (9,491) (7,521)
Interest and other income ..................... 313 71 120
Interest expense .............................. (2,051) (987) (247)
-------- -------- --------
Loss before income tax ........................ (18,239) (10,407) (7,648)
Income tax expense ............................ -- -- (238)
-------- -------- --------
Loss before preferred dividends
and extraordinary loss ...................... (18,239) (10,407) (7,886)
Extraordinary loss from debt
extinguishment (net of tax of $0) ........... (465) -- --
-------- -------- --------
Net loss ...................................... (18,704) (10,407) (7,886)
-------- -------- --------
Preferred stock dividends ..................... (902) (263) --
Embedded dividend attributable to
beneficial conversion privilege
of Convertible Preferred Stock .............. (332) (1,218) --
-------- -------- --------
Loss available to common stock ................ ($19,938) ($11,888) ($ 7,886)
======== ======== ========
Basic and diluted net loss per common share:
Loss before extraordinary loss .............. ($ .87) ($ .63) ($ .42)
Extraordinary loss .......................... (.02) -- --
-------- -------- --------
Net loss per common share ................... ($ .89) ($ .63) ($ .42)
======== ======== ========
Average number of common shares
outstanding, basic and diluted ..............22,505,084 18,888,911 18,670,477
========== ========== ==========
See accompanying notes to consolidated financial statements.
26
<PAGE>
nSTOR TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' 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, January 1, 1997 18,670,477 $ 934 - - $30,393 ($18,510) $12,817
Common stock option granted
to outside directors 61 61
Common stock warrants issued
in connection with borrowings 45 45
Net loss for the year ended
December 31, 1997 (7,886) (7,886)
---------- ------ ----- ------ ------- ------- --------
Balances, December 31, 1997 18,670,477 934 - - 30,499 (26,396) 5,037
Issuance of Convertible
Preferred Stock in private
placements:
Series B, less $262
of issuance cost 3,500 - 3,238 3,238
Series D, less $10
of issuance cost 2,700 - 2,690 2,690
Issuance of Convertible
Preferred Stock in
satisfaction of borrowings:
Series A, less $5
of issuance cost 1,667 - 995 995
Series C, less $4
of issuance cost (a) 2,000 - 1,996 1,996
Redemption of Convertible
Preferred Stock, Series B,
including $120 of
redemption costs (a) (2,300) - (2,420) (2,420)
Issuance of common stock in
connection with:
Conversion of Series B
Convertible Preferred
Stock 394,949 18 (200) - (18) -
Exercise of warrants 1,449,999 73 1,602 1,675
Preferred stock dividends (263) (263)
Embedded dividend attributable
to beneficial conversion
privilege of Convertible
Preferred Stock:
Series B 1,045 (1,045) -
Series A 173 (173) -
Common stock warrants
issued in connection with:
Long-term debt 427 427
Acquisition 148 148
Common stock options
granted to outside
directors 34 34
</TABLE>
27
<PAGE>
nSTOR TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
===============================================
(dollars in thousands) (concluded)
<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>
Net loss for the year
ended December 31, 1998 ( 10,407) ( 10,407)
---------- ------ ------ ------ ------- -------- --------
Balances, December 31, 1998 20,515,425 1,025 7,367 - 40,409 ( 38,284) 3,150
Issuance of Series E
Convertible Preferred Stock
in private placement, less
$16 of issuance cost 3,500 - 3,484 3,484
Issuance of Series F
Convertible Preferred Stock
for acquisition of Andataco,
less $21 of issuance cost 4,654 - 4,633 4,633
Issuance of common stock in
connection with:
Satisfaction of borrowings 2,523,462 126 6,714 6,840
Exercise of options and
warrants 1,686,241 85 2,760 2,845
Conversion of Convertible
Preferred Stock 200,000 10 (600) - (10) -
Acquisition of Andataco 924,118 46 1,802 1,848
Private placement 500,000 25 975 1,000
Other 168,578 8 338 346
Committed common stock
related to executive
termination, 123,479 shares 6 584 590
Common stock warrants issued
in connection with:
Long-term debt 791 791
Acquisition 200 200
Common stock options
granted to non-employees 152 152
Preferred stock dividends (902) (902)
Embedded dividend attrib-
utable to beneficial con-
version privilege of
Convertible Preferred Stock 332 (332) -
Net loss for the year
ended December 31, 1999 (18,704) (18,704)
---------- ------ ----- ------ ------- -------- --------
Balances, December 31, 1999 26,517,824 $1,331 14,921 $ - $63,164 ($58,222) $ 6,273
========== ====== ===== ====== ======= ======== =======
</TABLE>
- ----------
(a) In connection with the redemption of Series B Convertible Preferred
Stock during 1998, $1 million of the remaining Series B was exchanged
for Series C Convertible Preferred Stock. At December 31, 1999 there
were 3,000 shares outstanding of Series C Convertible Preferred Stock
with an aggregate stated value of $3 million.
See accompanying notes to consolidated financial statements.
28
<PAGE>
nSTOR TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
=====================================
(in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
1999 1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES: -------- -------- --------
<S> <C> <C> <C>
Net loss ($18,704) ($10,407) ($ 7,886)
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation and amortization 3,355 1,352 777
Write-down of goodwill 4,588 - -
Loss on extinguishment of debt 465 - -
Provision for inventory obsolescence 306 1,354 1,450
Provision for uncollectible accounts receivable 954 837 522
Amortization of deferred compensation 171 44 40
Amortization of deferred loan costs 621 140 27
Deferred income - - 182
Minority interest in net income of
consolidated subsidiary 130 - -
Changes in assets and liabilities, net of effects
from acquisition:
Decrease in accounts receivable 640 564 338
Decrease (increase) in inventories 1,459 (805) (1,912)
Decrease (increase) in prepaid expenses
and other 311 (112) (94)
Increase (decrease) in accounts payable and
other liabilities 403 (3,453) 242
------- ------- -------
Net cash used by operating activities (5,301) (10,486) (6,314)
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for acquisitions (1,372) (379) -
Additions to property and equipment (767) (456) (1,453)
------- ------- -------
Net cash used by investing activities (2,139) (835) (1,453)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (repayments) proceeds from
revolving bank credit facilities (2,590) (1,507) 3,245
Additions to other borrowings 7,075 10,803 988
Repayments on other borrowings (1,200) (3,424) -
Issuance of Convertible Preferred
Stock in private placements 1,962 5,928 -
Redemption of Convertible Preferred Stock - (2,420) -
Issuance of common stock in private placement 1,000 - -
Proceeds from exercise of stock options and warrants 2,519 1,675 -
Decrease (increase) in restricted
cash and cash equivalents - 503 (1,024)
Cash paid for preferred stock dividends (823) (151) -
------- ------- -------
Net cash provided by financing activities 7,943 11,407 3,209
------- ------- -------
Net increase (decrease) in unrestricted cash
and cash equivalents during the year 503 86 (4,558)
Unrestricted cash and cash equivalents at
beginning of period 147 61 4,619
------- ------- -------
Unrestricted cash and cash equivalents at end of period $ 650 $ 147 $ 61
======= ======= =======
</TABLE>
29
<PAGE>
nSTOR TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
=====================================
(in thousands) (concluded)
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Cash paid during period for:
Interest $ 941 $ 807 $ 140
======= ======= =======
Income taxes $ - $ 3 $ 238
======= ======= =======
NON-CASH INVESTING ACTIVITIES:
Acquisitions:
Fair value of assets acquired $30,527 $ 527 $ -
Liabilities assumed (16,667) - -
Acquisition Notes issued (5,100) - -
Series F Convertible Preferred Stock issued (4,654) - -
Common stock issued (2,194) - -
Common stock committed (340) - -
Warrant issued to seller (200) (148) -
------- ------- -------
Cash paid $1,372 $ 379 $ -
======= ======= =======
NON-CASH FINANCING ACTIVITIES:
Issuance of common stock in satisfaction
of borrowings $ 6,840 $ - $ -
======= ======= =======
Issuance of Convertible Preferred
Stock in satisfaction of
borrowings $ 1,500 $ 2,991 $ -
======= ======= =======
Embedded dividend attributable to beneficial
conversion privilege of Convertible Preferred
Stock:
Series B $ - $ 1,045 $ -
Series A 181 173 -
Series E 151 - -
------- ------- -------
$ 332 $ 1,218 $ -
======= ======= =======
Deferred loan costs arising from
issuance of warrants under
subordinated loans $ 791 $ 427 $ 45
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
30
<PAGE>
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. and all wholly-owned subsidiaries (collectively, the
"Company"). Significant intercompany balances and transactions have been
eliminated in consolidation.
Business
The Company is engaged as a manufacturer and supplier of high-availability,
high-performance Internet storage and customized Storage Area Network (SAN)
solutions, including external RAID (Redundant Array of Independent Disks)
solutions, tape backup products and advanced storage management software
solutions for the UNIX, Windows NT and Linux markets. (UNIX, Windows NT and
Linux are computer operating systems).
Cash and Cash Equivalents
Cash and cash equivalents consist of highly liquid investment instruments with
original maturities, when purchased, of three months or less.
Inventories
Inventories, consisting of raw materials, work-in-process and finished goods,
are stated at the lower of cost or market, with cost being determined based on
the first-in, first-out (FIFO) method. Reserves are recorded as necessary to
reduce obsolete inventory to estimated net realizable value. See Note 3 to
Consolidated Financial Statements.
Revenue Recognition
Revenue from the sale of products is recognized as of the date shipments are
made to customers, net of an allowance for returns. Revenue related to extended
warranty contracts is deferred and recognized over the period in which costs are
expected to be incurred, based upon historical evidence, in performing services
under the contracts. The Company also contracts with outside vendors to provide
services relating to various on-site warranties which are offered for sale to
customers; on-site warranty revenues and amounts paid in advance to outside
service organizations are recognized in the financial statements in sales and
cost of goods sold, respectively, over the warranty period.
Warranty Costs
A provision is made for warranty costs in excess of those provided for by the
original equipment manufacturer.
Long-Lived Assets
The Company has adopted the provisions of SFAS 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
This statement requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell.
31
<PAGE>
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided under the
straight-line method over the estimated useful lives, principally five years.
Leasehold improvements are amortized on a straight-line basis over the shorter
of the useful life of the asset or the lease term.
Goodwill and Other Intangible Assets
Intangible assets, substantially goodwill, are carried at cost and amortized
under the straight-line method generally over 7 to 15 years, the estimated
useful lives. Goodwill represents the excess cost of the acquired businesses
over the fair value of net assets acquired (see Notes 2 and 3 to Consolidated
Financial Statements).
During the fourth quarter of 1999 (see Note 15 to Consolidated Financial
Statements), the Company recorded a goodwill write-down of approximately $4.6
million. This write-down eliminated all remaining unamortized goodwill related
to the 1996 acquisition of Parity Systems, Inc (Parity). The Parity goodwill was
determined to have been impaired because of the Company's inability to generate
future operating income from the assets acquired in the Parity acquisition.
Research and Development Costs
Research and development costs are expensed as incurred.
Income Taxes
Income taxes are provided on the liability method whereby deferred tax assets
and liabilities are recognized for the expected tax consequences of temporary
differences between the tax bases and reported amounts of assets and
liabilities. Deferred tax assets and liabilities are computed using enacted tax
rates expected to apply to taxable income in the years in which temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities from a change in tax rates is recognized in income in the
period that includes the enactment date. The Company provides a valuation
allowance for certain deferred tax assets, if it is more likely than not that
the Company will not realize tax assets through future operations.
Net Loss Per Common Share ("EPS")
Basic EPS is calculated by dividing the income (loss) available to common
shareholders by the weighted average number of common shares outstanding for the
period, without consideration for common stock equivalents. Diluted EPS includes
the effect of potentially dilutive securities. For all periods presented, the
effect of including dilutive securities, stock options and warrants would have
been antidilutive. Accordingly, basic and diluted EPS for all periods presented
are equivalent.
As of December 31, 1999 and 1998, outstanding potentially dilutive securities
include the following, respectively: 4,622,997 and 2,946,500 shares underlying
stock options; 9,884,666 and 7,366,667 shares underlying convertible preferred
stock; 1,949,972 and 1,761,667 shares underlying warrants; 160,000 shares
underlying convertible debt and 123,479 shares underlying commitments under
severance agreements.
32
<PAGE>
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Actual results could materially differ from those estimates.
Management believes that its projected income from operations and its bank line
of credit will be sufficient to meet the Company's capital and operating
requirements for the next twelve months. If sales are less than projected, or if
the Company is unable to generate adequate cash flow from its sales, the Company
may need to seek additional sources of capital which may not be available on
terms acceptable to the Company and/or decrease its planned capital and
operating expenditures.
Financial Instruments
SFAS No.107, "Disclosures about Fair Value of Financial Instruments", requires
disclosure of fair value information about financial instruments. Fair value
estimates discussed herein are based upon certain market assumptions and
pertinent information available to management as of December 31, 1999 and 1998.
The respective carrying value of certain on-balance-sheet financial instruments
approximated their fair values. These financial instruments include cash and
cash equivalents, accounts receivable, accounts payable and accrued liabilities.
Fair values were assumed to approximate carrying values for these financial
instruments since they are short term in nature and their carrying amounts
approximate fair values or they are receivable or payable on demand. The fair
value of the Company's current borrowings and long-term debt is estimated based
upon quoted market prices for the same or similar issues or on the current rates
offered to the Company for debt of the same remaining maturities. The carrying
value approximates the fair value of current borrowings and long-term debt.
Dependence on Suppliers
The Company has and will continue to rely on outside vendors to manufacture
certain subsystems and electronic components and subassemblies used in the
production of the Company's products. Certain components, subassemblies,
materials and equipment necessary for the manufacture of the Company's products
are obtained from a sole supplier or a limited group of suppliers. The Company
performs ongoing quality and supply evaluation reviews with its outside vendors.
Supply, delivery and quality of subsystems and electronic components and
subassemblies have been adequate to fulfill customer orders and management does
not expect any vendor problems in the next 12 months.
Reclassifications
Certain prior years' amounts have been reclassified to conform to the current
year's presentations. These reclassifications had no impact on operating results
previously reported.
Comprehensive Income
Effective April 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" (SFAS 130). SFAS 130
establishes new rules for the reporting and display of comprehensive income
(loss) and its components in a full set of general-purpose financial statements.
All prior period data presented has been restated to conform to the provisions
of SFAS 130. The Company had no other comprehensive income (loss) for all
periods presented.
33
<PAGE>
New Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133 "Accounting for Derivative Financial Instruments and Hedging Activities."
SFAS No. 133 establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments embedded in
other contracts) be recorded in the balance sheet as either an asset or a
liability measured at its fair value. SFAS No. 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement, and requires that a company must formally
document, designate, and assess the effectiveness of transactions that receive
hedge accounting. SFAS 133, as amended by SFAS No. 137, is effective for years
beginning after June 15, 2000. We have not yet quantified the impact of adopting
SFAS No. 133 on our financial statements and have not determined the timing of
or method of its adoption of SFAS No. 133. However, SFAS No. 133 could increase
volatility in earnings and other comprehensive income.
(2) ACQUISITIONS
Andataco, Inc.
On June 8, 1999, the Company purchased approximately 76% of the total issued and
outstanding stock of Andataco, Inc. (Andataco) from affiliates of W. David Sykes
(Mr. Sykes), the then President of Andataco, for $5.1 million. The purchase
price was paid in the form of 9.5% subordinated promissory notes. The principal
balance of the notes is due on June 17, 2004. Andataco is a developer,
manufacturer, and marketer of high performance, high availability information
storage solutions for the open systems market.
As part of the acquisition of Andataco, the Company also acquired from Mr.
Sykes, a promissory note in the original principal amount of $5.2 million
payable by Andataco to Mr. Sykes. The purchase price for the promissory note
was: $.5 million in cash; 4,654 shares of the Company's Series F convertible
preferred stock convertible into an aggregate of 1,551,333 shares of the
Company's common stock based on a conversion price of $3.00 per share; and
three-year warrants to purchase an additional 155,133 shares of the Company's
common stock for $3.30 per share valued at $.2 million based on the
Black-Scholes option-pricing model.
On November 2, 1999, the Company acquired the remaining shares of Andataco by
exchanging approximately 924,000 shares of the Company's common stock (valued at
approximately $1.8 million) for the remaining shares of common stock held by
Andataco shareholders.
The acquisition, with an aggregate purchase price of $14.4 million, including
$1.6 million in acquisition costs, was accounted for under the purchase method
of accounting, with assets acquired and liabilities assumed recorded at
estimated fair values as of the respective acquisition dates. Effective with the
initial acquisition in June 1999, the operating results of Andataco have been
included in the Company's consolidated financial statements. The excess of the
purchase price over the fair value of net assets acquired (goodwill) aggregated
approximately $14.7 million and is being amortized on a straight-line basis over
seven years.
The following are unaudited pro forma results of operations as if the
acquisition of Andataco had occurred at the beginning of the fiscal years ended
December 31, 1999 and 1998 (in thousands except for per share data):
34
<PAGE>
Year Ended December 31,
------------------------------------------------
1999 1998
---------------------- ----------------------
Pro Forma Pro Forma
Historical Combined Historical Combined
---------- --------- ---------- ---------
Net sales $ 41,089 $ 65,338 $ 18,026 $ 95,545
Loss before preferred
dividends and extra-
ordinary loss $ (18,239) $ (20,104) $ (10,407) $ (12,673)
Net loss available
to common stock $ (19,938) $ (22,110) $ (11,888) $ (14,956)
Basic and diluted
net loss per share $ (0.89) $ (0.95) $ (0.63) $ (0.77)
Average number of common
shares outstanding,
basic and diluted 22,505,084 23,320,333 18,888,911 19,435,911
These pro forma results may not be indicative of the results of operations that
would have been reported if the transaction had occurred as of these dates, or
which may be reported in future periods.
(3) BALANCE SHEET COMPONENTS (in thousands)
Substantially all assets are pledged as collateral for indebtedness (see Note 5
to Consolidated Financial Statements).
December 31,
---------------
1999 1998
------ ------
Accounts Receivable
Trade receivables $8,759 $2,964
Less allowance for doubtful accounts (1,604) (502)
------ ------
7,155 2,462
Other receivables 171 -
------ ------
$7,326 $2,462
====== ======
Prepaid expenses and Other
Prepaid service costs $1,174 $ -
Other 440 364
------ ------
$1,614 $ 364
====== ======
Inventories
Raw materials $4,942 $2,641
Work-in-process 454 95
Finished goods 892 292
------ ------
$6,288 $3,028
====== ======
35
<PAGE>
Property and Equipment
Computer equipment $4,075 $1,313
Computer software 770 729
Leasehold improvements 788 332
Furniture, fixtures and office equipment 465 288
Other 310 243
------ ------
6,408 2,905
Less accumulated depreciation (2,932) (1,252)
------ ------
$3,476 $1,653
====== ======
Depreciation expense amounted to approximately $1.8 million and $.9 million for
the years ended December 31, 1999 and 1998, respectively.
Goodwill and Other Intangible Assets
Goodwill $15,497 $6,545
Intellectual assets 347 347
------ ------
15,844 6,892
Less accumulated amortization (1,311) (939)
------ ------
$14,533 $5,953
====== ======
Amortization of goodwill and other intangible assets amounted to approximately
$1.6 million and $.5 million for the years ended December 31, 1999 and 1998,
respectively. During the fourth quarter of 1999, the Company recorded a goodwill
write-down of $4.6 million (See Note 1 to Consolidated Financial Statements).
Accounts payable and other
Accounts payable $ 8,072 $2,436
Deferred revenue 2,426 -
Other 3,616 999
------ ------
$14,114 $3,435
====== ======
(4) INCOME TAXES
The Company accounts for income taxes in accordance with SFAS 109, which
requires recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Under the SFAS 109 asset and liability method,
deferred tax assets and liabilities are determined based upon the difference
between the financial statement and tax bases of assets and liabilities using
enacted tax rates in effect for the year(s) in which the differences are
expected to reverse.
A reconciliation of the provision for income taxes to the amount computed by
applying the statutory federal income tax rate to income before income taxes
follows (dollars in thousands):
36
<PAGE>
Year Ended December 31,
1999 1998 1997
-------- -------- --------
Amount computed at Federal statutory
rate of 34% ($6,359) ($3,538) ($2,681)
Amortization of non-deductible
intangible assets 533 - -
Expenses not deductible for tax
purposes 159 79 51
Losses not deductible for tax purposes 158 - -
Exercise of non-qualified stock options (272) - -
Alternative minimum taxes - - 238
Losses for which no current benefits
are available 5,781 3,459 2,630
--------- -------- --------
Provision for income taxes $ - $ - $ 238
========= ======== ========
The tax effects of temporary differences that gave rise to significant portions
of deferred tax assets are as follows (in thousands):
December 31,
1999 1998
------ ------
Deferred tax assets:
Net operating loss carryforwards $12,295 $6,267
Alternative minimum tax carryforward 770 332
Research and development credit
carryforward 1,422 802
Depreciation and amortization 1,571 148
Allowance for doubtful accounts 546 (171)
Inventory and warranty reserves 860 (222)
------ ------
Net deferred tax assets 17,464 7,156
Less valuation allowance (17,464) (7,156)
------ ------
Deferred taxes $ - $ -
====== ======
At December 31, 1999 and 1998, a 100% valuation allowance has been provided on
the total deferred income tax assets because it is more likely than not that
loss carryforwards will not be realized based on recent operating results.
As of December 31, 1999, there were unused net operating loss carryforwards (the
"NOL's") for regular federal 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 acquisition of Andataco in 1999 caused a change in ownership for income tax
purposes. Under Internal Revenue Code Section 382, the usage of approximately $8
million of Andataco's federal NOL carryforward and approximately $2 million of
the California NOL carryforward will be limited annually to approximately $.4
million. The usage of Andataco's tax credit carryforward is also subject to
limitation because of the change in ownership.
For the year ended December 31, 1997, the provision for federal income tax
expense of $.2 million represents AMT taxes paid during 1997.
37
<PAGE>
(5) BORROWINGS
Bank Line of Credit
Andataco Revolver
The Andataco Revolver 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 Andataco Revolver
currently bears interest at prime plus 1/2 percent (9.0% at December 31, 1999)
and matures in April 2002. Andataco pays a facility fee of .25% based on the
average unused portion of the maximum borrowings. Advances under the Andataco
Revolver are collateralized by substantially all assets of Andataco. The
Andataco Revolver provides for certain financial covenants, including Andataco
maintaining a certain minimum working capital and tangible net worth. During the
second quarter ended June 30, 1999, Andataco was not in compliance with the
financial covenant regarding tangible net worth; however, effective July 13,
1999, the lender agreed to waive the default, subject to, among other things,
receipt from nStor of a $.5 million capital contribution. On July 16, 1999,
nStor contributed $.5 million in cash as a capital contribution to Andataco. As
of December 31, 1999, the outstanding balance of the Andataco Revolver was $5.1
million and an additional approximately $.2 million was available based on
eligible collateral. The weighted interest rate on the Andataco Revolver was
8.7% for the year ended December 31, 1999. See note 14 to consolidated financial
statements.
nStor Revolver
In January 2000, the Company paid off the outstanding balance and terminated the
nStor revolving line of credit agreement (nStor Revolver). During fiscal 1999,
the nStor Revolver provided for borrowings based on the lesser of $5 million or
80% of eligible accounts receivable, as defined. Interest was paid based on
prime plus 2% (10.5% at December 31, 1999). The Company paid a facility fee
equal to 1% per annum on the total facility of $5 million. Advances under the
nStor Revolver were collateralized by substantially all assets of the Company
(excluding those of Andataco), including $.5 million reflected as Restricted
Cash as of December 31, 1998. The balance under the nStor Revolver as of
December 1999 was $10,000. The weighted interest rate on the nStor Revolver was
10.0% and 10.1% for the years ended December 31, 1999 and 1998, respectively.
Notes Payable, Director Loans and Extraordinary Loss on Extinguishment of Debt
At December 31, 1998, current borrowings included $.3 million due to a company
controlled by H. Irwin Levy, a director and principal shareholder of the Company
(collectively, Mr.Levy). During 1999, Mr. Levy advanced an additional $3.6
million to the Company. Of these amounts, the Company satisfied $.8 million by
issuing 395,000 shares of the Company's common stock and satisfied $1.5 million
by issuing 1,500 shares of the Company's Series E Convertible Preferred Stock
(see note 9 to Consolidated Financial Statements). At December 31, 1999, current
borrowings included $1.6 million due to Mr. Levy, the maximum amount available
under a revolving basis with interest at 10% per annum, due 30 days from demand.
Aggregate interest expense paid to Mr. Levy was $149,000, $217,000 and $27,000
for the years ended December 31, 1999, 1998 and 1997, respectively. In January
2000, the promissory note was paid off and satisfied in full. See note 14 to
consolidated financial statements.
38
<PAGE>
In December 1999, the Company issued 1,878,462 shares of its common stock in
full satisfaction of $5.5 million of Notes Payable, including 338,462 shares of
common stock in full satisfaction of $1 million of Notes Payable to Mr. Levy and
a company controlled by Mr. Levy; 42,308 shares of common stock in full
satisfaction of $.1 million of Notes Payable to a company controlled by Mark
Levy, a Director of the Company until January 2000; 42,308 shares of common
stock in full satisfaction of $.1 million of Notes Payable to a company
controlled by another member of the Levy family; and 84,615 shares of common
stock in full satisfaction of $.3 million of Notes Payable to Bernard Green, a
Director of the Company (Mr. Green). On the date of satisfaction, the
unamortized discount on the Notes Payable was $.5 million which was recorded as
an extraordinary loss on extinguishment of debt. The remaining Notes Payable
amounted to $1.3 million (net of $21,000 of unamortized discount) at December
31, 1999, bear interest at 10% per annum and mature on September 5, 2001, as
extended.
In connection with the issuance of $5 million of Notes Payable in 1998 and $1.8
million in 1999, the Company issued warrants to purchase 2,266,666 shares
(600,000 in 1999 and 1,666,666 in 1998) of the Company's common stock including
warrants to purchase 333,332 shares of the Company's common stock to Mr. Levy
and a privately owned corporation controlled by Mr. Levy; warrants underlying
41,666 shares to Mark Levy; 41,667 shares to companies controlled by another
member of the Levy family; and 83,333 shares to Mr. Green. The warrants were
valued under the Black-Scholes option-pricing model as of their respective dates
of issuance at an aggregate of $1.2 million and were recorded as a discount to
the Notes Payable, of which $582,000 and $137,000 was amortized as interest
expense for the years ended December 31, 1999 and 1998, respectively.
Acquisition Notes
In connection with the acquisition of Andataco (See Note 2 to Consolidated
Financial Statements), the Company issued $5.1 million in subordinated
promissory notes to affiliates of Mr. Sykes (Acquisition Notes). The Acquisition
Notes bear interest at 9.5% per annum and become due in June 2004.
Convertible Notes
The Company has issued certain convertible notes with a face amount of $400,000,
which have been discounted based on an effective interest rate of 12%, include
accrued interest of $222,000 and $214,000 at December 31, 1999 and 1998,
respectively, mature in 2000 and are convertible into 160,000 shares of common
stock of the Company (based on one common share for each $2.50 of face amount).
Maturities
Scheduled and estimated maturities of the Company's borrowings are as follows:
Years ending December 31,
2000 $ 7,325
2001 1,229
2002 -
2003 -
2004 5,100
-------
Total payments 13,654
Less current portion 7,325
-------
Long-Term portion $ 6,329
=======
39
<PAGE>
(6) SEGMENT INFORMATION AND SIGNIFICANT CUSTOMERS
The Company operates predominantly in one business segment, information storage
solutions, including external RAID subsystems. The Company's customers include
end users, original equipment manufacturers, integrators and value added
resellers. Financial instruments which potentially subjects the Company to
concentrations of credit risk are primarily accounts receivable. The Company
performs ongoing credit evaluations of its customers, generally requires no
collateral and maintains allowances for potential credit losses and sales
returns. Sales to two customers accounted for 15% and 11%, 27% and 13%, and 11%
and 10% for the years ended December 31, 1999, 1998 and 1997, respectively. No
other customer accounted for 10% or more of sales in any of the three years
presented.
Sales to geographic areas other than the United States have not been
significant.
(7) LITIGATION
In June 1996, Jack Ehrenhuas, Mark Schindler, Eugene Stricker, Amnon Damty, Ehud
Mendelson and Susan Felton filed a Complaint in the Supreme Court of the State
of New York, County of Nassau, against the Company and Michael Wise, its then
Chairman of the Board and currently a director. The plaintiffs claim to have
contractual and proprietary interests in the prospect of a transaction to
purchase certain net assets acquired by the Company and seek compensatory
damages plus punitive damages.
In August 1996, The Nais Corporation, Mark Schindler, Eugene Stricker, Amnon
Damty, Ehud Mendelson and Susan Felton filed a Complaint in the same Court
making similar allegations against a subsidiary of the Company, its then
president, R. Daniel Smith ("Mr. Smith"), and a company controlled by Mr. Smith.
In this action, the plaintiffs seek compensatory damages plus punitive damages
for alleged breach of contract.
Both cases are currently in discovery. Counsel for the Company believes that the
Company has good defenses to both claims and that it will not incur any material
liability. The Company is unaware of any facts that would support any of the
plaintiffs' claims and, accordingly, the Company believes that the claims are
without merit.
From time to time, the Company is subject to legal proceedings and other claims
arising in the ordinary course of business. In the opinion of management, the
Company is not a party to any litigation the outcome of which would have a
material adverse effect on its business or operations or cash flows.
(8) COMMON STOCK
On March 30, 1999, the Company issued 645,000 shares of common stock (including
395,000 shares to Mr. Levy) in satisfaction of approximately $1.3 million of
debt.
In April 1999, the Company issued 500,000 shares of common stock and a warrant
to purchase an aggregate of 250,000 shares of common stock at a purchase price
of $2.00 per share, for $1 million in cash to a private investor.
In November 1999, the Company acquired the remaining shares of Andataco common
stock by merging Andataco with a wholly owned subsidiary, which had been
organized for that purpose. In the merger, the Company issued approximately
924,000 shares of common stock, with an aggregate value of $1.8 million, to the
Andataco shareholders in exchange for the remaining shares of Andataco common
stock. As part of the acquisition cost of Andataco, the Company issued 168,578
shares of common stock to a financial advisor of Andataco.
40
<PAGE>
In December 1999, the Company issued 1,878,462 shares of common stock in full
satisfaction of $5.5 million of Notes Payable.
Also in December 1999, 600 shares of the Series F Preferred Stock were converted
into 200,000 shares of common stock at a conversion price of $3.00 per share.
During fiscal year 1999, the Company issued approximately 1,686,000 shares of
common stock on the exercise of stock options and warrants for an aggregate
amount of $2.8 million.
(9) 8% CONVERTIBLE PREFERRED STOCK
EITF 98-5 addresses accounting for preferred stock which is convertible into
common stock at a discount from the market rate at the date of issuance. In
accordance with this EITF a preferred stock dividend, attributable to such a
beneficial conversion privilege should be recorded for the difference between
the conversion price and the quoted market price of common stock at the date of
issuance. Accordingly, during 1999 and 1998, the Company recorded $.3 million
and $1.2 million, respectively, as an additional embedded dividend attributable
to the beneficial conversion privilege on its convertible preferred stock.
Series A
On July 7, 1998, the Company borrowed $1 million from a private investor under
an 8% Convertible Subordinated Debenture (the "Debenture"), payable on September
25, 1998, as extended. In September 1998, the Debenture was converted into 1,667
shares of the Company's 8% Convertible Preferred Stock, Series A (the "Series A
Preferred Stock").
The Series A Preferred Stock with a stated value of $1 million as of December
31, 1999 accrued dividends at 8% per annum, payable quarterly and was
convertible into shares of the Company's common stock based on a fixed
conversion price of $.60 per share. On February 1, 2000 all of the Series A
Preferred Stock was converted into 1,666,667 shares of the Company's common
stock.
Series B
Effective April 14, 1998, the Company received $3.2 million in cash (net of $.3
million in issuance costs), including $1 million from Mr. Levy, from a private
placement of 8% Convertible Preferred Stock, Series B (the "Series B Preferred
Stock"). The Series B Preferred Stock was convertible into common stock, on
various dates through April 2000, at a conversion price equal to the lesser of
$1.44 per share or 77% of the market price at the date of conversion. At
closing, the Company issued warrants to purchase 280,000 shares of the Company's
common stock (including 80,000 to Mr. Levy), exercisable at any time through
April 2001 at an exercise price of $1.50 per share.
In July and September 1998, $200,000 of the Series B Preferred Stock held by
unrelated private investors was converted into 394,949 shares of the Company's
common stock.
On October 30, 1998, the Company redeemed $2.3 million of the Series B Preferred
Stock held by unrelated private investors for approximately $2.5 million in cash
(including a premium of $.1 million and accrued dividends of $.1 million) and
warrants to purchase 300,000 shares of the Company's common stock, exercisable
upon issuance at $1.00 per share and expiring in October 2001. In conjunction
with this redemption, effective October 28, 1998, the Company issued 8%
Convertible Preferred Stock, Series C (the "Series C Preferred Stock") with a
stated value of $1 million in exchange for the remaining $1 million of Series B
Preferred Stock which was held by Mr. Levy.
41
<PAGE>
As a result of these two transactions, all of the Company's convertible
preferred stock which was based on a variable conversion price was redeemed
either for cash or preferred stock that is based on a fixed conversion price.
Series C
The Series C Preferred Stock with a stated value of $3 million (including the $1
million that was exchanged for Series B) as of December 31, 1999 accrues
dividends at 8% per annum, payable quarterly, is convertible into shares of the
Company's common stock based on a fixed conversion price of $1.00 per share and
has an automatic conversion feature in which each share not converted as of July
7, 2000 automatically converts into the Company's common stock. Mr. Levy holds
all of the 3,000 outstanding shares of the Series C Preferred Stock.
Series D
During October 1998, the Company received $2.7 million in cash from unrelated
private investors in a private placement of its 8% Convertible Preferred Stock,
Series D (the "Series D Preferred Stock"). Of this amount, $2.5 million was used
in the redemption of the Series B Preferred Stock. The Series D Preferred Stock
with a stated value of $2.7 million as of December 31, 1999, accrues dividends
at 8% per annum, payable quarterly, is convertible into shares of the Company's
common stock based on a fixed conversion price of $1.00 per share and has an
automatic conversion feature in which each share not converted into the
Company's common stock within three years from the date of issuance is
automatically converted. On February 1, 2000 $.7 million of the Series D
Preferred Stock was converted into 700,000 shares of the Company's common stock.
Series E
In a private placement of its Series E Convertible Preferred Stock, (the "Series
E Preferred Stock") in June 1999, the Company issued 3,500 shares for $3.5
million, of which $1.5 million was in satisfaction of borrowings from Mr. Levy,
and three-year warrants to purchase an aggregate of 116,667 shares of the
Company's common stock at a price of $3.30 per share (including 50,000 shares to
Mr. Levy). The Series E Preferred Stock with a stated value of $3.5 million as
of December 31, 1999 requires quarterly dividends at the following annual rates:
8% during the first year, 9% during the second year and 10% thereafter. The
Series E Preferred Stock is convertible into shares of the Company's common
stock based on a fixed conversion price of $3.00 per share.
Series F
As part of the acquisition of Andataco, the Company issued 4,654 shares of
Series F Convertible Preferred Stock (the "Series F Preferred Stock") to Mr.
Sykes. The shares of Series F Preferred Stock, with a stated value of $4.7
million, are convertible into the Company's common stock based on a fixed
conversion price of $3.00 per share. The Series F Convertible Preferred Stock
requires quarterly dividends at the following annual rates: 8% during the first
year, 9% during the second year and 10% thereafter. In December 1999, 600 shares
of the Series F Preferred Stock were converted into 200,000 shares of the
Company's common stock. In January and February 2000, an additional 3,118 shares
of Series F Preferred Stock were converted into 1,039,300 shares of the
Company's common stock.
42
<PAGE>
(10) STOCK OPTIONS AND WARRANTS
The Company applies APB Opinion 25, "Accounting for Stock Issued to Employees,"
and related interpretations in accounting for options granted to employees under
its Option Plan (the "Plan"). Under APB Opinion 25, if options are granted at
exercise prices less than fair market value, compensation expense is recorded
for the excess of the fair market value on the date of grant over the exercise
price.
Under the Plan, qualified and nonqualified stock options to purchase up to seven
million shares of the Company's common stock may be granted to officers,
directors, key employees and non-employees. The maximum term of the options
granted under the Plan is ten years. The stock options granted under the Plan
generally vest over three to five years annually on an equal basis.
SFAS No.123, "Accounting for Stock-Based Compensation," requires the Company to
provide pro forma information regarding net income and earnings per share as if
compensation cost for stock options granted under the Plan, if applicable, had
been determined in accordance with the fair value based method prescribed in
SFAS 123.
The Company estimates the fair value of each stock option at the grant date by
using the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants: no dividend yield; expected lives of ten years;
volatility at 60% for 1999, 60% for 1998 and ranging from 57% to 60% for 1997,
and; risk-free interest rates of 5.6% for 1999, 5.3% for 1998, and ranging from
5.7% to 6.79% for 1997.
Under the accounting provisions of SFAS 123, the Company's net loss and loss per
share, for the years ended December 31, 1999, 1998 and 1997 would have been
reduced to the pro forma amounts indicated below (in thousands, except per
share):
Year Ended December 31,
------------------------------
1999 1998 1997
-------- -------- --------
Net loss:
As reported ($18,704) ($10,407) ($7,886)
Pro forma ($18,811) ($10,836) ($8,123)
Loss per share:
As reported ($.89) ($.63) ($.42)
Pro forma ($.89) ($.65) ($.43)
43
<PAGE>
Changes in options outstanding are summarized as follows:
Weighted-
Average
Weighted- Fair
Average Value Per
Exercise Share of
Price Options
Shares Per Share Granted
(in thousands)
------ --------- ---------
Balance, January 1, 1997 1,475 2.53
Granted - equal to
market value 325 2.21 1.64
Forfeited (35) 2.10
-----
Balance, December 31, 1997 1,765 2.48
-----
Granted - equal to
market value 881 1.38 1.03
Granted - exceeds
market value 1,160 1.14 .52
Forfeited (860) 1.98
-----
Balance, December 31, 1998 2,946(a) 1.67
Granted - equal to
market value 3,453 2.23 1.60
Exercised (818) 1.75
Forfeited (958) 1.97
-----
Balance, December 31, 1999 4,623
=====
- ------------
(a) In June 1998, the Company granted a conditional Employee Incentive Stock
Option to its then President, Lawrence F. Steffann, to purchase 750,000 shares
of the Company's common stock. The grant was conditional because of the 2.5
million share limitation under the Plan. On November 1, 1999 the shareholders of
the Company approved to amend the 1996 Stock Option Plan to increase the number
of shares reserved for issuance under the Plan from 2,500,000 to 7,000,000.
At December 31, 1999, 1998 and 1997, a total of 853,000, 1,189,000 and 705,000,
respectively, of the outstanding options were exercisable with a
weighted-average exercise price of $2.20, $2.31 and $2.91, respectively, per
share. The number of options available to grant under the Plan was 1,708,503 and
0 as of December 31, 1999 and 1998, respectively.
44
<PAGE>
The following table summarizes information about fixed stock options at December
31, 1999:
Weighted
Weighted Average
Number Average Weighted Number Exercise
Outstanding Remaining Average Exercisable Price of
Exercise at Dec. 31, Contractual Exercise at Dec. 31, Exercisable
Prices 1999 Life Price 1999 Options
(in thousands) (in thousands)
- -------- ----------- ----------- -------- ----------- -----------
$.50-$1.75 1,783 8.9 years $1.41 326 $1.09
$2.00-$2.69 2,595 9.3 years $2.23 327 $2.20
$3.00-$4.00 245 7.4 years $3.82 200 $4.00
----- --------- ----- ----- -----
$.50-$4.00 4,623 9.0 years $1.99 853 $2.19
===== ========= ===== ===== =====
At December 31, 1999, the Company had outstanding warrants under which 1,949,972
shares of common stock could be acquired. Information relating to these warrants
is summarized as follows:
Number of
Shares Warrant Price
(in thousands) Per Share Total
----------- ------------ -----------
Balance, January 1, 1997 500 $2.10 $ 1,050,000
Warrants issued 55 $2.35 129,000
--------- ----------
Balance, December 31, 1997 555 $2.10-$2.35 1,179,000
Warrants issued 4,324 $1.00-$2.35 5,691,000
Warrants exercised (1,450) $1.00-$1.50 (1,675,000)
Warrants canceled (1,667) $1.50 (2,500,000)
---------- ----------
Balance, December 31, 1998 1,762 $1.00-$2.35 2,695,000
Warrants issued 1,122 $2.00-$3.30 3,197,000
Warrants exercised (870) $1.00-$2.10 (1,378,000)
Warrants expired (64) $2.10 (134,000)
---------- ----------
Balance, December 31, 1999 1,950 $1.25-$3.30 $ 4,380,000
========= ==========
45
<PAGE>
Number
of Shares
Subject to
Expiration Warrants Exercise
Date (in thousands) Price
---------- ---------- --------
January 2000 30 $2.10
October 2000 65 $2.35
December 2000 400 $1.38
March 2001 333 $1.25
January 2002 600 $3.00
April 2002 250 $2.00
June 2002 272 $3.30
-----
1,950
=====
As of December 31, 1999, the Company had reserved common stock for the following
purposes (in thousands):
Convertible preferred stock 9,885
1996 Stock Option Plan 4,623
Stock warrants 1,950
Severance agreements 123
Convertible notes payable 160
------
16,741
======
(11) RELATED PARTY TRANSACTIONS
Syko Properties
The Company currently leases its San Diego corporate office from an entity owned
by Mr. Sykes, an officer of the Company until early 2000, after which date he
was no longer affiliated with the Company. The Company paid this entity
approximately $193,000 during the year ended December 31, 1999 under the terms
of the lease agreement.
Hilcoast Advisory Services, Inc. ("Advisor")
From July 1996 through October 1997, the Company paid $6,000 per month, and
commencing again in October 1999, began paying $5,000 per month, plus
reimbursement of out-of-pocket expenses, to Advisor for certain financial
consulting and administrative services provided to the Company. Mr. Levy is the
Chairman of the Board, Chief Executive Officer and a majority shareholder of the
Advisor's parent. Management believes that the terms of this agreement were no
less favorable to the Company than those that would be received from other
sources.
(12) LEASES
The Company leases its operating facilities under operating leases which expire
at various dates through March 2003. At December 31, 1999, future minimum rental
payments under operating leases that have initial or remaining terms in excess
of one year were as follows (in thousands):
46
<PAGE>
Due to Due to
Non-related Related
Party Party Total
-------- ------- -------
2000 $ 438 $ 331 $ 769
2001 210 331 541
2002 152 331 483
2003 86 83 169
-------- ------ ------
$ 886 $1,076 $ 1,962
======= ======= ======
Rent expense was $790,000, $513,000 and $485,000 for the years ended December
31, 1999, 1998 and 1997, respectively (see Note 11 to Consolidated Financial
Statements).
(13) 401(k) PLAN
The Company's 401(k) Tax Deferred Savings Plan (the "401(k) Plan") covers
substantially all employees meeting certain minimum age and service
requirements. Company contributions to the plan are determined by the Board of
Directors. The Company has made no contributions to the 401(k) Plan as of
December 31, 1999.
(14) SUBSEQUENT EVENTS
OneofUs Company Limited
On January 19, 2000, the Company acquired substantially all of the assets of
OneofUs Company Limited for an aggregate purchase price of $2,850,000,
consisting of $250,000 cash and 776,000 shares of the Company's common stock
with an aggregate value of $2,600,000 (based on the average market price of the
Company's stock during the ten (10) trading days ended January 19, 2000). The
shares were issued to three selling stockholders pursuant to employment
agreements and to a fourth selling stockholder in connection with a
confidentiality, noncompetition and nonsolicitation agreement. We agreed to
register the shares on a Registration Statement on Form S-3. OneofUs is a
Taiwan-based, privately-held designer of high performance Fibre Channel RAID
controllers and storage solutions for open systems and the Storage Area Network
market.
Borg Adaptive Technologies, Inc.
On January 10, 2000, the Company sold substantially all of the assets of Borg
Adaptive Technologies, Inc., a wholly-owned subsidiary of the Company, to a
wholly-owned subsidiary of QLogic Corporation, for $7.5 million cash. The assets
included all of the intellectual property rights relating to the Adaptive RAID
technology, including software, patents and trademarks, and certain tangible
assets, including test and office equipment and tenant improvements. The Company
expects to record a gain of approximately $6.5 million from this transaction
during the first quarter of fiscal year 2000. The Borg division costs were $1.0
million and $.7 million in 1999 and 1998, respectively.
In connection with the sale, the Company retained a perpetual license to use,
compile and modify the software relating to the Adaptive RAID technology, as
well as a license to distribute, market and sublicense the software in
conjunction with our storage products.
47
<PAGE>
Executive Management
On January 20, 2000, the Company entered into a letter agreement with Harris
Ravine (Mr. Ravine), the former Chief Executive Officer of the Company's
Andataco subsidiary, relating to the termination of his employment. Pursuant to
the agreement, the Company issued 80,000 shares of common stock to Mr. Ravine
and paid him $10,000 in cash.
On January 26, 2000, the Company entered into a termination agreement with
Lawrence F. Steffann (Mr. Steffann), the Company's former President, relating to
the termination of his employment. Pursuant to the agreement, the Company issued
43,479 shares of common stock to Mr. Steffann and paid him approximately $27,000
in cash.
Effective January 17, 2000, Larry Hemmerich (Mr. Hemmerich) was appointed the
Company's new President and Chief Executive Officer. In connection with this
appointment, the Company entered into a two-year employment agreement with Mr.
Hemmerich, providing for an annual base salary of $325,000, a $125,000 bonus in
the first year and a bonus based upon meeting certain objectives set by the
Board of Directors in the second year.
Borrowings
At February 29, 2000 and March 31, 2000, Andataco was not in compliance
with the minium tangible net worth covenant pursuant to the Andataco Revolver;
however, effective March 29, 2000, the lender agreed to waive the default for
both periods. Effective April 14, 2000, the Company and the lender agreed to
amend certain terms of the Andataco Revolver including the following: a change
in the borrower from Andataco to the Company; an increase in the interest
rate to prime plus 1.5%; and new minimum net worth and net income covenants on
a consolidated basis. All other significant provisions of the Andataco Revolver
remain the same.
Effective April 12, 2000, Mr. Levy agreed to commit to a $2 million revolving
line of credit facility to the Company, which bears interest at 10% per annum.
The maturity date on this line of credit is the earlier of April 30, 2001 or
when the Company executes its amended bank line of credit.
(15) FOURTH QUARTER ADJUSTMENTS
During the fourth quarter of 1999, the Company recorded a write-down of goodwill
of $4.6 million (see Note 1 to Consolidated Financial Statements). The Company
also recorded a write-down of $.6 million resulting from a re-valuation of
certain inventory, which included potentially obsolete inventory and
transitional issues associated with transferring the operational portion of the
business from Lake Mary to San Diego. Management was unable to reasonably
estimate the effect, if any, of certain of those adjustments on prior quarters
in 1999 because of the timing of completion of the acquisition of Andataco.
(16) COMMITMENTS
The common stock issued to Mr. Ravine and Mr. Steffann in January 2000 in
connection with their employment termination agreements was recorded as
committed common stock as of December 31, 1999.
48
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors of
nStor Technologies, Inc.
The audits referred to in our report dated February 21, 2000, except as to the
last two paragraphs of note 14, which are as of April 14, 2000, relating to the
consolidated financial statements of nStor Technologies, Inc., which are
contained in Item 8 of this Form 10-K included in the audit of the financial
statement schedules listed in the accompanying index. The financial statement
schedules are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statement schedules based upon our
audits.
In our opinion, such financial statement schedules present fairly, in all
material respects, the information set forth therein.
BDO Seidman, LLP
Costa Mesa, California
February 21, 2000, except
as to the last two paragraphs
of Note 14, which are as of
April 14, 2000
49
<PAGE>
nSTOR TECHNOLOGIES, INC.
Schedule I--Condensed Financial Information of Registrant
Fiscal Year Ended December 31, 1999
The following represents the condensed unconsolidated balance sheet for nStor
Technologies, Inc. as of December 31, 1999, and the condensed unconsolidated
statements of operations and cashflows for the year ended December 31, 1999.
CONDENSED UNCONSOLIDATED BALANCE SHEET
(in thousands)
December 31,
ASSETS 1999
------ -------
Current assets:
Cash and cash equivalents ...................................... $ 466
Prepaid expenses and other ..................................... 79
--------
Total current assets ..................................... 545
Investments in and receivables from subsidiaries ................. 14,945
Other non-current assets ......................................... 68
--------
$ 15,558
LIABILITIES =======
----------
Current liabilities:
Borrowings .................................................... $ 2,214
Accounts payable and other .................................... 550
Dividends payable ............................................. 192
--------
Total current liabilities ................................ 2,956
Notes payable .................................................... 6,329
--------
Total liabilities ........................................ 9,285
--------
SHAREHOLDERS' EQUITY
--------------------
Preferred stock, $.01 par; 1,000,000 shares authorized,
in order of preference:
Convertible Preferred Stock; Series F, 4,054
and 0 issued and outstanding as of December 31, 1999
and 1998, respectively, aggregate liquidation value
$4,054; Series A, 1,667 issued and outstanding,
aggregate liquidation value $1,000; Series C, 3,000
issued and outstanding, aggregate liquidation value
$3,000; Series D, 2,700 issued and outstanding,
aggregate Liquidation value $2,700; Series E, 3,500
and 0 issued and outstanding as of December 31, 1999
and 1998, respectively, liquidation value $3,500 ............... --
Common stock, $.05 par; 75,000,000 shares authorized;
26,517,824 and 20,515,425 shares issued and outstanding
at December 31, 1999 and December 31, 1998, respectively ........ 1,331
Additional paid-in capital ....................................... 63,164
Accumulated deficit .............................................. (58,222)
--------
Total shareholders' equity ............................... 6,273
--------
$ 15,558
========
50
<PAGE>
nSTOR TECHNOLOGIES, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
CONDENSED UNCONSOLIDATED STATEMENT OF INCOME
(in thousands)
Year Ended
December 31,
1999
----------
Loss from investment in subsidiaries .......................... ($16,137)
Other income .................................................. 92
--------
(16,045)
Operating expenses:
Selling, general and administrative ......................... 637
--------
Operating loss ................................................ (16,682)
Other expense:
Interest expense ............................................ 1,557
--------
Loss before preferred dividends and
extraordinary loss ........................................... (18,239)
Extraordinary loss from debt extinguishments
(net of tax of $0) ........................................... (465)
--------
Net loss ...................................................... (18,704)
--------
Preferred stock dividends ..................................... (902)
Embedded dividend attributable to
beneficial conversion privilege
of Convertible Preferred Stock .............................. (332)
--------
Loss available to common stock ................................ ($19,938)
========
51
<PAGE>
nSTOR TECHNOLOGIES, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONCLUDED)
CONDENSED UNCONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
Year Ended
December 31,
1999
CASH FLOWS FROM OPERATING ACTIVITIES: ------------
Net loss ....................................................... ($18,704)
Adjustments to reconcile net loss to
net cash used by operating activities:
Amortization of deferred compensation costs ................ 171
Amortization of deferred loan costs ........................ 620
Loss on extinguishment of debt ............................. 476
Changes in assets and liabilities, net of effects
from acquisition:
Decrease in receivables from subsidiaries .............. 8,567
Increase in prepaid expenses and other ................. (141)
Increase in accounts payable and
other liabilities .................................... 188
--------
Net cash used by operating activities ............................ (8,823)
--------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for acquisitions ..................................... (1,354)
--------
Net cash used by investing activities ............................ (1,354)
--------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from other borrowings ................................. 7,075
Repayments on other borrowings ................................. (1,200)
Issuance of Convertible Preferred Stock in private
placements, net of costs ...................................... 1,962
Issuance of common stock in private placement .................. 1,000
Proceeds from exercise of stock options and warrants ........... 2,519
Cash paid for preferred stock dividends ........................ (823)
--------
Net cash provided by financing activities ...................... 10,533
--------
Net increase in unrestricted cash and cash equivalents
during the year ................................................. 356
Unrestricted cash and cash equivalents at beginning of
period .......................................................... 110
--------
Unrestricted cash and cash equivalents at end of period .......... $ 466
========
52
<PAGE>
nSTOR TECHNOLOGIES, INC.
Schedule II-- Valuation and Qualifying Accounts
Fiscal Years Ended December 31, 1999, 1998 and 1997
Additions
Balance at Additions Resulting Balance at
Beginning Charged from End of
of Year to Income Merger Deductions* Year
---------- --------- ---------- ----------- ----------
Allowance for Doubtful
Accounts Receivable:
1999.................. $ 502,000 $ 954,000 $ 228,000 $ 80,000 $1,604,000
1998.................. 500,000 837,000 -- 835,000 502,000
1997.................. 550,000 522,000 -- 572,000 500,000
Allowance for Inventory
Obsolescence:
1999.................. $ 428,000 $1,497,000 $2,085,000 $ 591,000 $3,419,000
1998.................. 1,839,000 1,354,000 -- 2,765,000 428,000
1997.................. 902,000 1,450,000 -- 513,000 1,839,000
- ---------
* Deductions represent amounts written off against the allowance, net of
recoveries.
53
<PAGE>
Item 9. Disagreement on Accounting and Financial Disclosure
Not Applicable
PART III
Item 10. Directors and Executive Officers of the Registrant
For information concerning this item, see the text under the caption "Election
of Directors" and "Management" in our definitive Proxy Statement (the "Proxy
Statement") to be filed with respect to our 2000 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 25 of this Form 10-K.
(2) Financial statement schedules have been omitted because they are not
required, or because the information required therein is set forth in the
Consolidated Financial Statements or the notes thereto.
(3) Exhibits - See Exhibit Index at page 58-62 of this Form 10-K.
(b) The Registrant filed reports on Form 8-K during the fourth quarter of
1999 as follows:
(i) A report on Form 8-K dated November 1, 1999 and filed November 5, 1999,
reporting under Item 2 - Acquisition or Disposition of Assets and Item 5 -
Other Events, and Exhibits, in which the Company announced its acquisition
of the remaining 22.8% of the common stock of Andataco, Inc.
54
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
2.1 Purchase Agreement, dated as of March 2, 1999, by and among the
registrant, W. David Sykes and the Sykes Children's Trust of 1993
dated November 22, 1993 (13)
2.2 Amendment No. 1 to Purchase Agreement, dated as of April 26, 1999, by
and among the registrant, W. David Sykes, the Sykes Family Trust and
the Sykes Children's Trust of 1993 dated November 22, 1993 (13)
2.3 Amendment No. 2 to Purchase Agreement, dated as of April 26, 1999, by
and among the registrant, W. David Sykes, the Sykes Family Trust and
the Sykes Children's Trust of 1993 dated November 22, 1993 (13)
2.4 Merger Agreement dated as of August 27, 1999 by and among nStor
Technologies, Inc., NTI Acquisition Corp. and Andataco, Inc. (12)
2.5 Asset Purchase Agreement dated as of January 10, 2000, by and among
nStor Corporation, Inc., Borg Adaptive Technologies, Inc., QLogic
Acquisition Corporation and QLogic Corporation (9)
3.1 Restated Certificate of Incorporation filed with State of Delaware on
December 28, 1999 (8)
3.2 By-laws of Registrant, as amended (6)
3.3 Certificate of Elimination of the Designation of the Series A
Preferred Stock of Registrant (3)
4.1 Form of Warrant dated January 26, 1999 issued in connection with
Promissory Note dated January 26, 1999 between Registrant, (i) Herbert
Gimelstob, for 200,000 shares, (ii) Maurice Halperin, for 200,000
shares, (iii) Patricia Auld, for 100,000 shares and (iv) James P.
Marden, for 100,000 shares (7)
4.2 Certificate of Designation of Series A Convertible Preferred Stock (1)
4.3 Certificate of Designation of Series B Convertible Preferred Stock (1)
4.4 Form of Share Exchange Agreement dated June 9, 1998 between Registrant
and holders of the Series A Preferred Stock whereby such holders
exchanged their Series A Preferred Stock for Series B Preferred Stock
(3)
4.5 Certificate of Designation of Series C Convertible Preferred Stock (1)
4.6 Certificate of Designation of Series D Convertible Preferred Stock (1)
4.7 Form of Warrant dated September 22, 1998 issued in connection with
extending certain subordinated notes as follows: (i) Bernard Marden -
333,334 shares; (ii) Herbert Gimelstob - 416,667 shares; (iii) Fairway
Partnership - 333,334 shares; (iv) H. Irwin Levy - 166,666 shares; (v)
Bernard Green - 83,333 shares; (vi) Meyer Capital - 83,333 shares;
(vii) MLL Corp. - 166,666 shares; (viii) JoJo Corp. - 41,666 shares;
(ix) N&S Corp. - 41,667 shares (7)
4.8 Subscription Agreement between Registrant and Maurice Halperin in
connection with Series A Convertible Preferred Stock (1)
55
<PAGE>
4.9 Registration Rights Agreement between Registrant and Maurice Halperin
in connection with Series A Convertible Preferred Stock (1)
4.10 Form of Warrant dated October 28, 1998 issued in connection with
Redemption of Series B Convertible Preferred Stock, between Registrant
and (i) CPR (USA), Inc., 180,000 shares, (ii) LibertyView Fund, 23,400
shares and (iii) LibertyView Plus Fund, 96,600 shares (1)
4.11 Form of Subscription Agreement between Registrant and H. Irwin Levy
for loans made by H. Irwin Levy to Registrant which were exchanged for
Series C Convertible Preferred Stock (1)
4.12 Subscription Agreement between Registrant and H. Irwin Levy for the
exchange of Series B Convertible Preferred Stock for Series C
Convertible Preferred Stock (1)
4.13 Registration Rights Agreement between Registrant and H. Irwin Levy for
Series C Convertible Preferred Stock (1)
4.14 Letter Agreement between Registrant and H. Irwin Levy regarding Series
C Convertible Preferred Stock (1)
4.15 Letter Agreement between Registrant and LibertyView Capital
Management, Inc. regarding the redemption of $2.3 million of Series B
Convertible Preferred Stock (1)
4.16 Letter Agreement between Registrant and LibertyView Capital
Management, Inc. regarding registration rights for warrants issued in
connection with the redemption of $2.3 million of Series B Convertible
Preferred Stock (1)
4.17 Form of Subscription Agreement for Series D Convertible Preferred
Stock (1)
4.18 Form of Registration Rights Agreement for Series D Convertible
Preferred Stock (1)
4.19 Restated Certificate of Incorporation of the Registrant, - see Exhibit
3.1 above
4.20 By-Laws of Registrant, as amended - see Exhibit 3.2 above
4.21 8% Convertible Subordinated Debenture dated June 7, 1998 issued by
Registrant to Maurice Halperin, as amended on August 7, 1998 (2)
4.22 Form of Subscription Agreement dated as of December 16, 1999, by and
among the Registrant and certain noteholders (8)
4.23 Nonqualified Stock Option Agreement, dated as of March 26, 1999,
between the registrant and Norbert D. Witt (14)
4.24 Certificate of Designation of Series E Convertible Preferred Stock
(13)
4.25 Certificate of Designation of Series F Convertible Preferred Stock
(13)
4.26 Warrant dated June 8, 1999, issued to W. David Sykes (13)
4.27 Form of warrant, dated June 8, 1999, issued to purchasers of Series E
Convertible Preferred Stock (13)
4.28 9.5% Subordinated Note, dated June 8, 1999, issued to the Sykes
Children's Trust of 1993 (13)
56
<PAGE>
4.29 9.5% Subordinated Note, dated June 8, 1999, issued to the Sykes Family
Trust (13)
4.30 Registration Rights Agreement, dated June 8, 1999, by and between
nStor Technologies, Inc. and W.
David Sykes (13)
4.31 Form of Registration Rights Agreement, dated June 8, 1999, issued to
the purchasers of Series E Convertible Preferred Stock (13)
4.32 Form of Employee Agreement between the registrant and W. David Sykes
(13)
4.33 Letter Agreement, dated June 8, 1999, by and between H. Irwin Levy and
W. David Sykes (13)
10.1 Promissory Note for $500,000 dated March 15, 1999 between Registrant
and Maurice Halperin (7)
10.2 Promissory Note for $1 million dated March 1, 1999 between Registrant
and H. Irwin Levy (7)
10.3 Form of Promissory Note dated January 26, 1999 between Registrant and
(i) Herbert Gimelstob ($600,000), (ii) Maurice Halperin ($600,000),
(iii) Patricia Auld ($300,000) and (iv) James P. Marden ($300,000) (7)
10.4 Loan and Security Agreement dated August 3, 1998 by and among the
Registrant, nStor Corporation, Inc. and Finova Capital Corporation (2)
10.5 Form of Amended and Restated Promissory Note dated September 22, 1998
between Registrant and Bernard Marden, Herbert Gimelstob, Fairway
partnership and H. Irwin Levy (1)
10.6 Security Agreement between Registrant and H. Irwin Levy dated July 31,
1998 (1)
10.7 Loan Agreement between Registrant and H. Irwin Levy dated July 31,
1998 for $1.5 million (1)
10.8 Employment Agreement between Registrant and Lawrence Steffann dated as
of June 1, 1998 (7)
10.9 Employee Incentive Stock Option Agreement between Registrant and
Lawrence Steffann, dated as of June 1, 1998 (7)
10.10 1996 Stock Option Plan, dated October 5, 1996. (6)
10.11 Amended and Restated Promissory Note dated March 5, 1998 between
Registrant and H. Irwin Levy for $2 million (5)
10.12 Amended and Restated Loan Agreement dated March 5, 1998 between H.
Irwin Levy and Registrant, in the amount of $2 million. (5)
10.13 Promissory Note in the amount of $1 million dated March 5, 1998
between Fairway Partnership and Registrant (Duplicate notes were also
executed for the same amount between Registrant and (i) Bernard A.
Marden and (ii) Herbert Gimelstob.) (5)
57
<PAGE>
10.14 Amended and Restated Security Agreement dated March 5, 1998 between
H. Irwin Levy, Fairway Partnership, Herbert Gimelstob, and Bernard A.
Marden (collectively, referred to as "Secured Parties") (5)
10.15 Collateral Assignment of Note, Loan Agreement, Security Agreement and
Security Instruments among Registrant and Secured Parties, dated March
5, 1998. (5)
10.16 Stock Purchase Agreement dated February 2, 1998 between nStor
Corporation, Inc. and David Stallmo, Randy K. Hall and Gerald
Hohoenstein (4)
10.17 Form of amendment to Stock Purchase Agreement at 10.16 (four
amendments, all of which extended the closing date of the proposed
transaction) (4)
10.18 Software License Agreement dated as of January 10, 2000 by and among
nStor Corporation, Inc. and QLogic Acquisition Corporation (9)
10.19 Amendment to nStor Technologies, Inc. 1996 Stock Option Plan (10)
10.20 Modification dated November 1, 1999, of Demand Note dated July 15,
1999 between Registrant and H. Irwin Levy (11)
10.21 Form of Amended and restated Promissory Note dated January 29, 1999,
between Registrant and (i) Herbert Gimelstob ($600,000), (ii) Maurice
Halperin ($600,000), (iii) Patricia Auld ($300,000) and (iv) James P.
Marden ($300,000) (11)
10.22 Form of Amended and restated Promissory Note dated September 22,
1998, between Registrant and Bernard Marden, Herbert Gimelstob,
Fairway Partnership and H. Irwin Levy (11)
10.23 Modification dated December 1, 1999, of Demand Note dated July 15,
1999 between Registrant and H. Irwin Levy
10.24 Modification dated December 16, 1999, of Demand Note dated July 15,
1999 between Registrant and H. Irwin Levy
10.25 Letter of commitment dated April 12, 2000 for $2 million between H.
Irwin Levy and Registrant
21 Subsidiaries of the Registrant
23 Consent of BDO Seidman, LLP
27 Financial Data Schedule
- --------------
(1) Incorporated by reference to Exhibits previously filed as Exhibits to
Registrant's Form 10-Q for the quarter ended September 30, 1998, filed
November 16, 1998.
(2) Incorporated by reference to Exhibits previously filed as Exhibits to
Registrant's Form 10-Q for the quarter ended June 30, 1998, filed
August 13, 1998.
(3) Incorporated by reference to Exhibits previously filed as Exhibits to
Registrant's Amendment No.1 to Registration Statement on Form S-3
filed on June 22, 1998.
(4) Incorporated by reference to Exhibits previously filed as Exhibits to
Registrants Form 10-Q for the quarter ended March 31, 1998, filed May
15, 1998.
(5) Incorporated by reference to Exhibits filed as Exhibits to Registrants
Form 10-K for the year ended December 31, 1997, filed on April 15,
1998.
58
<PAGE>
(6) Incorporated by reference to Exhibits previously filed as Exhibits to
Registrant's Form 10-K dated January 27, 1997, filed January 28, 1997.
(7) Incorporated by reference to Exhibits previously filed as Exhibits to
registrant's Form 10-K for the year ended December 31, 1998 dated
April 12, 1999, filed April 15, 1999.
(8) Incorporated by reference to Exhibits previously filed as Exhibits to
registrant's Form S-3 dated and filed January 19, 2000.
(9) Incorporated by reference to Exhibits previously filed as Exhibits to
registrant's Form 8-K dated and filed January 14, 2000.
(10) Incorporated by reference to Exhibits previously filed as Exhibits to
registrant's Form S-8 dated January 6, 2000, filed January 10, 2000.
(11) Incorporated by reference to Exhibits previously filed as Exhibits to
registrant's Form 10-Q for the quarter ended September 30, 1999, filed
November 15, 1999.
(12) Incorporated by reference to Exhibits previously filed as Exhibits to
registrant's Form 8-K dated and filed November 5, 1999.
(13) Incorporated by reference to Exhibits previously filed as Exhibits to
registrant's Form 8-K dated June 8, 1999, filed June 23, 1999.
(14) Incorporated by reference to Exhibits previously filed as Exhibits to
registrant's Form S-3 filed July 2, 1999.
59
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 and 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
nSTOR TECHNOLOGIES, INC.
/s/ Larry Hemmerich
March 29, 2000 By:________________________________
Larry Hemmerich, Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
/s/ H. Irwin Levy
March 29, 2000 ___________________________________________
H. Irwin Levy, Chairman of the Board
/s/ Michael L. Wise
March 29, 2000 ___________________________________________
Michael L. Wise, Director
/s/ Bernard Green
March 29, 2000 ___________________________________________
Bernard Green, Director
/s/ Roger H. Felberbaum
March 29, 2000 ___________________________________________
Roger H. Felberbaum, Director
/s/ Larry Hemmerich
March 29, 2000 ___________________________________________
Larry Hemmerich, Chief Executive Officer
and Director
/s/ Jack Jaiven
March 29, 2000 ___________________________________________
Jack Jaiven, Principal Financial
Officer and Principal Accounting Officer
Exhibit 10.23
ALL INDEBTEDNESS EVIDENCED HEREBY AND REFERENCED HEREIN IS SUBORDINATED IN RIGHT
OF PAYMENT TO THE PRIOR PAYMENT IN FULL OF ALL INDEBTEDNESS OWED TO FINOVA
CAPITAL CORPORATION
NOTE MODIFICATION AGREEMENT
THIS NOTE MODIFICATION AGREEMENT made and entered into as of the 1st day of
December 1999, by and between H. Irwin Levy (hereinafter called "Payee") and
nStor Technologies, Inc., a Delaware corporation (hereinafter called "Maker").
W I T N E S S E T H:
WHEREAS, Payee is the holder of a Demand Note executed by Maker dated April 1,
1999, evidencing Maker's indebtedness to Payee in the original principal amount
of FIVE HUNDRED THOUSAND and 00/100ths U.S. Dollars (U.S. $500,000.00) (a copy
of said Demand Note is attached hereto and incorporated herein as Exhibit"A");
and
WHEREAS on or about July 15, 1999, the above-described Demand Note was modified
pursuant to a Note Modification Agreement to increase the principal amount of
the Demand Note from FIVE HUNDRED THOUSAND and 00/100ths US Dollars (U.S.
$500,000.00) to SEVEN HUNDRED FIFTY THOUSAND and 00/100ths U.S. Dollars (U.S.
$750,000,000); and
WHEREAS, on or about November 1, 1999, the above-described Demand Note was
further modified pursuant to a Note Modification Agreement to increase the
principal amount of the Demand Note from SEVEN HUNDRED FIFTY THOUSAND and
00/100ths U.S. Dollars ($750,000.00) to ONE MILLION and 00/100 U.S. Dollars
($1,000,000.00 and
WHEREAS, Maker desires to have available to borrow under the line of credit an
additional principal amount of FIVE HUNDRED THOUSAND and 00/100ths U.S. Dollars
(U.S. $500,000.00) pursuant to the attached Demand Note, and to increase the
Principal Amount of the attached Demand Note to a total of ONE MILLION FIVE
HUNDRED THOUSAND and 00/100ths U.S. Dollars (U.S. $1,500,000.00); and
WHEREAS, Payee is willing to make available to Maker under the line of credit an
additional sum of FIVE HUNDRED THOUSAND AND 00/100ths U.S. Dollars (U.S.
$500,000.00) and to increase the Principal Amount of the attached Demand Note to
a total Principal Amount of ONE MILLION FIVE HUNDRED THOUSAND and 00/100ths U.S.
Dollars (U.S. $1,500,000.00);
NOW, THEREFORE, in consideration of the premises and the covenants and
agreements herein contained, the sum of TEN and 00/100ths U.S. Dollars (U.S.
$10.00) and other good and valuable considerations, the receipt and sufficiency
whereof is hereby acknowledged, the parties do hereby agree as follows:
1. The foregoing recitals are true and correct in all respects.
2. The parties hereby agree that as of the 1st day of December 1999,
Payee shall make available to Maker under its line of credit an
additional principal sum of FIVE HUNDRED THOUSAND and 00/100th U.S.
Dollars (U.S. $500,000.00) subject to the terms and conditions
contained in the Demand Note, a copy of which is attached hereto and
incorporated herein as Exhibit "A".
3. The parties further agree that as of December 1, 1999, the "Principal
Amount" as that term is defined in the Demand Note attached hereto and
incorporated herein as Exhibit "A", shall hereinafter mean the total
sum of ONE MILLION FIVE HUNDRED THOUSAND and 00/100ths U.S. Dollars
(U.S. $1,500,000.00) which Maker has made available to Payee under its
line of credit pursuant to said Demand Note.
4. The parties hereby agree that the Principal Amount, as hereinabove
amended, which is outstanding under the line of credit, shall bear
interest at the rate of ten percent (10%) per annum, payable monthly,
as set forth in the attached Demand Note, until the Principal Amount
of the Demand Note as hereinabove amended is paid in full.
5. The parties hereby agree and acknowledge that all other terms and
conditions as set forth in the attached Demand Note shall remain the
same throughout the term of the note and shall apply to the Principal
Amount of ONE MILLION FIVE HUNDRED THOUSAND and/00/100ths U.S. DOLLARS
(U.S. $1,500,000.00).
6. The Maker hereby certifies, confirms and agrees that the Demand Note,
as hereinbefore and hereinabove modified and amended, is in full force
and effect, is valid and enforceable in accordance with its terms and
conditions, and is not subject to any defenses or offsets of any kind
or nature whatsoever.
7. This agreement shall be binding upon the parties hereto and their
respective successors and assigns.
IN WITNESS WHEREOF, the parties hereto have caused these presents to be executed
on the day and year first above written.
Maker:
NStor Technologies, Inc.
By: /S/ Diane Wong
___________________________________
Name: Diane Wong
Title: Controller
Payee:
By: /S/ H. Irwin Levy
___________________________________
Name: H. Irwin Levy
Exhibit 10.24
ALL INDEBTEDNESS EVIDENCED HEREBY AND REFERENCED HEREIN IS SUBORDINATED IN RIGHT
OF PAYMENT TO THE PRIOR PAYMENT IN FULL OF ALL INDEBTEDNESS OWED TO FINOVA
CAPITAL CORPORATION
NOTE MODIFICATION AGREEMENT
THIS NOTE MODIFICATION AGREEMENT made and entered into as of the 16th day of
December 1999, by and between H. Irwin Levy (hereinafter called "Payee") and
nStor Technologies, Inc., a Delaware corporation (hereinafter called "Maker").
W I T N E S S E T H:
WHEREAS, Payee is the holder of a Demand Note executed by Maker dated
April 1, 1999, evidencing Maker's indebtedness to Payee in the original
principal amount of FIVE HUNDRED THOUSAND and 00/100ths U.S. Dollars (U.S.
$500,000.00) (a copy of said Demand Note is attached hereto and
incorporated herein as Exhibit "A"); and
WHEREAS on or about July 15, 1999, the above-described Demand Note was
modified pursuant to a Note Modification Agreement to increase the
principal amount of the Demand Note from FIVE HUNDRED THOUSAND and
00/100ths US Dollars (U.S. $500,000.00) to SEVEN HUNDRED FIFTY THOUSAND and
00/100ths U.S. Dollars ($750,000,000); and
WHEREAS, on or about November 1, 1999, the above-described Demand Note
was further modified pursuant to a Note Modification Agreement to increase
the principal amount of the Demand Note from SEVEN HUNDRED FIFTY THOUSAND
and 00/100ths U.S. Dollars ($750,000.00) to ONE MILLION and 00/100ths U.S.
Dollars ($1,000,000.00); and
WHEREAS, on or about December 1, 1999, the above-described Demand Note
was further modified pursuant to a Note Modification Agreement to increase
the principal amount of the Demand Note from ONE MILLION and 00/100ths U.S.
Dollars ($1,000,000.00) to ONE MILLION FIVE HUNDRED and 00/100ths U.S.
Dollars ($1,500,000.00); and
WHEREAS, Maker desires to have available to borrow under the line of
credit an additional principal amount of ONE HUNDRED THOUSAND and 00/100ths
U.S. Dollars ($100,000.00) pursuant to the attached Demand Note, and to
increase the Principal Amount of the attached Demand Note to a total of ONE
MILLION SIX HUNDRED THOUSAND and 00/100ths U.S. Dollars ($1,600,000.00);
and
WHEREAS, Payee is willing to make available to Maker under the line of
credit an additional sum of ONE HUNDRED THOUSAND AND 00/100ths U.S. Dollars
($100,000.00) and to increase the Principal Amount of the attached Demand
Note to a total Principal Amount of ONE MILLION SIX HUNDRED THOUSAND and
00/100ths U.S. Dollars ($1,600,000.00).
NOW, THEREFORE, in consideration of the premises and the covenants and
agreements herein contained, the sum of TEN and 00/100ths U.S. Dollars
($10.00) and other good and valuable considerations, the receipt and
sufficiency whereof is hereby acknowledged, the parties do hereby agree as
follows:
1. The foregoing recitals are true and correct in all respects.
2. The parties hereby agree that as of the 16th day of December 1999,
Payee shall make available to Maker under its line of credit an
additional principal sum of ONE HUNDRED THOUSAND and 00/100th U.S.
Dollars ($100,000.00) subject to the terms and conditions contained in
the Demand Note, a copy of which is attached hereto and incorporated
herein as Exhibit "A".
3. The parties further agree that as of December 16, 1999, the "Principal
Amount" as that term is defined in the Demand Note attached hereto and
incorporated herein as Exhibit "A", shall hereinafter mean the total
sum of ONE MILLION SIX HUNDRED THOUSAND and 00/100ths U.S. Dollars
($1,600,000.00) which Maker has made available to Payee under its line
of credit pursuant to said Demand Note.
4. The parties hereby agree that the Principal Amount, as hereinabove
amended, which is outstanding under the line of credit, shall bear
interest at the rate of ten percent (10%) per annum, payable monthly,
as set forth in the attached Demand Note, until the Principal Amount
of the Demand Note as hereinabove amended is paid in full.
5. The parties hereby agree and acknowledge that all other terms and
conditions as set forth in the attached Demand Note shall remain the
same throughout the term of the note and shall apply to the Principal
Amount of ONE MILLION SIX HUNDRED THOUSAND and/00/100ths U.S. DOLLARS
($1,600,000.00).
6. The Maker hereby certifies, confirms and agrees that the Demand Note,
as hereinbefore and hereinabove modified and amended, is in full force
and effect, is valid and enforceable in accordance with its terms and
conditions, and is not subject to any defenses or offsets of any kind
or nature whatsoever.
7. This agreement shall be binding upon the parties hereto and their
respective successors and assigns.
IN WITNESS WHEREOF, the parties hereto have caused these presents to be
executed on the day and year first above written.
Maker:
nStor Technologies, Inc.
By: /S/ Diane Wong
_____________________________________
Name: Diane Wong
Title: Controller
Payee:
By: /S/ H. Irwin Levy
_____________________________________
Name: H. Irwin Levy
Exhibit 10.25
April 12, 2000
nStor Technologies, Inc.
Re: Financing
Gentlemen:
This letter confirms that the undersigned has agreed to commit to a $2,000,000
revolving line of credit facility to nStor Technologies until nStor has
successfully completed an agreement with a financial institution for a line of
credit which would finance nStor's daily operations (the"Bank Closing Date").
The terms of this commitment will be based on interest at 10% per annum payable
monthly, with a maturity date based on the earlier of the Bank Closing Date or
April 30, 2001.
Very truly yours,
/s/ H. Irwin Levy
___________________
H. Irwin Levy
HIL:bf
100 Century Boulevard
West Palm Beach, FL 33417
EXHIBIT 21
nSTOR TECHNOLOGIES, INC.
Exhibit 21
Subsidiaries of the Company
and
State of Incorporation or Formation
nStor Corporation, Inc. Delaware
Imge R & D, Inc. Delaware
Imge Distribution, Inc. Delaware
Imge Marketing, Inc. Delaware
Andataco, Inc. Massachusetts
Andataco of California, Inc. California
nStor Technologies Asia, Inc. Florida
Consent of Independent Certified Public Accountants
To the Board of Directors of
nStor Technologies, Inc.
We hereby consent to the incorporation by reference in the Registration
Statements on Forms S-3 (333-69495, 333-82223 and 333-94935), Form S-4
(333-86093) and Forms S-8 (333-35495 and 333-94305) of our report dated February
21, 2000, except as to the last two paragraphs of Note 14, which are as of April
14, 2000, relating to the consolidated financial statements of nStor
Technologies, Inc. and of our report dated February 21, 2000, except as to the
last two paragraphs of Note 14, which are as of April 14, 2000, relating to the
schedule appearing in the Company's Annual Report on Form 10-K for the year
ended December 31, 1999.
BDO SEIDMAN, LLP
Cost Mesa, California
April 14, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000075448
<NAME> NSTOR TECHNOLOGIES, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 673 <F1>
<SECURITIES> 0
<RECEIVABLES> 8,930
<ALLOWANCES> (1,604)
<INVENTORY> 6,288
<CURRENT-ASSETS> 15,901
<PP&E> 22,252 <F2>
<DEPRECIATION> (4,243)<F3>
<TOTAL-ASSETS> 34,041
<CURRENT-LIABILITIES> 16,338
<BONDS> 0
0
0 <F4>
<COMMON> 1,331
<OTHER-SE> 4,942
<TOTAL-LIABILITY-AND-EQUITY> 34,041
<SALES> 41,089
<TOTAL-REVENUES> 41,402
<CGS> 31,326
<TOTAL-COSTS> 22,909
<OTHER-EXPENSES> 3,355 <F5>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,051
<INCOME-PRETAX> (18,239)
<INCOME-TAX> 0
<INCOME-CONTINUING> (18,239)
<DISCONTINUED> 0
<EXTRAORDINARY> (465)
<CHANGES> 0
<NET-INCOME> (18,704)<F6>
<EPS-BASIC> (0.89)
<EPS-DILUTED> (0.89)
<FN>
<F1> Cash includes restricted cash of $23
<F2>PP&E includes $15,844 of goodwill and other intangible assets.
<F3>Accumulated depreciation includes $1,311 of accumulated amortization
on goodwill and other intangible assets.
<F4>Preferred stock issued and outstading as of 12/31/99 includes the following:
Series A Convertible Preferred Stock - 1,667 shares; Series C Convertible
Preferred Stock - 3,000 shares; Series D Convertible Preferred Stock - 2,700
shares; Series E Convertible Preferred Stock - 3,500 shares; Series F
Convertible Preferred Stock - 4,054 shares.
<F5>Other expenses include depreciation and amortization.
<F6>Net loss does not include $1,234 of dividends on preferred stock.
Net loss applicable to common stock is $19,938.
</FN>
</TABLE>
