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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report pursuant to Section 13 or 15 (d) of the Securities and
Exchange Act of 1934.
For the quarterly period ended July 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: 0-10370
ANDATACO, INC.
--------------
(Exact name of Registrant as specified in its charter)
MASSACHUSETTS 04-2511897
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(State or jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10140 Mesa Rim Rd., San Diego, California 92121
(Address of principal executive offices and Zip Code)
(619) 453-9191
(Registrant's Telephone Number, including area code)
Indicate by a check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter periods that the
Registrant was required to file such reports), and (2) has been subject to
filing requirements for the past 90 days. Yes X No
___ ___
As of August 26, 1999, there were 25,432,303 shares of the Registrant's common
stock, $0.01 par value, issued and outstanding.
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Andataco, Inc.
FORM 10-Q INDEX
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Page No.
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheet at July 31, 1999 (unaudited)
and October 31, 1998 3
Consolidated Statement of Operations (unaudited) for the
three-month and nine-month periods ended July 31, 1999
and 1998 4
Consolidated Statement of Cash Flows (unaudited) for the
nine-month period ended July 31, 1999 and 1998 5
Notes to Consolidated Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
PART II. OTHER INFORMATION
Item 6. Exhibits and reports on Form 8-K 14
Signatures
Part I: FINANCIAL INFORMATION
Item 1: Consolidated Financial Statements
ANDATACO, INC.
Consolidated Balance Sheet
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July 31, October 31,
1999 1998
(UNAUDITED)
Assets
Current assets:
Cash ............................................................................... $ 23,000 $ 23,000
Accounts receivable, net ........................................................... 8,004,000 10,628,000
Inventories ........................................................................ 4,945,000 4,923,000
Other current assets ............................................................... 1,841,000 634,000
----------- -----------
Total current assets .............................................................. 14,813,000 16,208,000
Goodwill, net ....................................................................... 4,738,000 5,993,000
Property and equipment, net ......................................................... 2,665,000 3,415,000
Other assets ........................................................................ 60,000 66,000
----------- -----------
$22,276,000 $25,682,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................................................... $ 6,269,000 $ 7,853,000
Accrued expenses ................................................................... 2,176,000 2,610,000
Deferred revenue ................................................................... 2,336,000 2,259,000
----------- -----------
Total current liabilities .................................................... 10,781,000 12,722,000
----------- -----------
Long-term liabilities:
Bank line of credit ............................................................ 5,793,000 5,462,000
Shareholder loan ................................................................. 5,196,000 5,196,000
----------- -----------
Total long-term liabilities ................................................ 10,989,000 10,658,000
----------- -----------
Shareholders' equity:
Common stock ................................................................ 254,000 238,000
Additional paid in capital .................................................... 10,669,000 10,107,000
Accumulated deficit .......................................................... (10,417,000) (8,043,000)
----------- -----------
Total shareholders' equity ................................................ 506,000 2,302,000
----------- -----------
$22,276,000 $25,682,000
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See notes to unaudited consolidated financial statements.
3
ANDATACO, INC.
Consolidated Statement of Operations
(Unaudited)
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Three months ended Nine months ended
July 31, July 31,
1999 1998 1999 1998
Sales $14,486,000 $17,092,000 $45,856,000 $59,848,000
Cost of sales 10,381,000 12,733,000 32,756,000 42,033,000
----------- ----------- ----------- -----------
Gross profit 4,105,000 4,359,000 13,100,000 17,815,000
----------- ----------- ----------- -----------
Operating expenses:
Selling, general and
administrative 4,468,000 5,325,000 13,900,000 17,788,000
Rent expense to officer 83,000 83,000 249,000 249,000
Research and development 145,000 568,000 651,000 1,482,000
----------- ----------- ----------- -----------
Total operating expenses 4,696,000 5,976,000 14,800,000 19,519,000
----------- ----------- ----------- -----------
Loss from operations (591,000) (1,617,000) (1,700,000) (1,704,000)
Net benefit on settlement of
litigation (72,000) - (72,000) -
Interest expense 147,000 140,000 395,000 428,000
Interest expense to shareholder 117,000 117,000 351,000 351,000
----------- ----------- ----------- -----------
Net loss $ (783,000) $(1,874,000) $(2,374,000) $(2,483,000)
=========== =========== =========== ===========
Net loss per share (basic
and diluted) $(0.03) $(0.08) $(0.10) $(0.10)
=========== =========== =========== ===========
Shares used in computing
net loss per share (basic
and diluted) 24,099,904 23,819,399 23,913,928 23,819,399
=========== =========== =========== ===========
See notes to unaudited consolidated financial statements.
4
ANDATACO, INC.
Consolidated Statement of Cash Flow
(Unaudited)
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Nine Months Ended
July 31,
1999 1998
Cash flows from operating activities:
Net loss $(2,374,000) $(2,483,000)
Adjustments to reconcile net loss to cash
(used in) provided by operating activities:
Depreciation 1,234,000 1,237,000
Amortization of goodwill 1,255,000 1,254,000
Stock compensation 78,000 -
Changes in assets and liabilities:
Accounts receivable 2,624,000 2,494,000
Inventories (22,000) 2,499,000
Other assets (1,201,000) (27,000)
Accounts payable (1,584,000) (1,091,000)
Accrued expenses (434,000) (1,528,000)
Deferred revenue 77,000 863,000
----------- -----------
Net cash (used in) provided by operating activities (347,000) 3,218,000
----------- -----------
Cash flows from investing activities:
Payments for purchases of property and equipment (484,000) (1,298,000)
----------- -----------
Net cash used in investing activities (484,000) (1,298,000)
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Cash flows from financing activities:
Borrowings (payments) under bank line of credit agreement (net) 331,000 (1,500,000)
Proceeds from issuance of common stock 500,000 -
Payments on notes payable - (141,000)
----------- -----------
Net cash provided by (used in) financing activities 831,000 (1,641,000)
----------- -----------
Net change in cash - 279,000
Cash at beginning of period 23,000 41,000
----------- -----------
Cash at end of period $ 23,000 $ 320,000
=========== ===========
See notes to unaudited consolidated financial statements.
5
ANDATACO, INC.
Notes to Consolidated Financial Statements
(Unaudited)
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NOTE 1- BASIS OF PRESENTATION
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 reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
The accompanying unaudited consolidated financial statements of Andataco,
Inc. ("ANDA", or the "Company") have been prepared by the Company without audit
pursuant to the rules and regulations of the Securities and Exchange Commission
for Form 10-Q. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements and should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's annual report
on Form 10-K for the year ended October 31, 1998. In the opinion of management,
the accompanying unaudited consolidated financial statements contain all
adjustments, consisting of only normal recurring items, necessary for a fair
presentation of the Company's financial position as of July 31, 1999 and its
results of operations for the three-month and nine-month periods ended July 31,
1999 and 1998. The interim financial information contained herein is not
necessarily indicative of the results to be expected for any other interim
period or the full fiscal year ending October 31, 1999.
NOTE 2 - CHANGE IN CONTROL AND BUSINESS COMBINATION
nStor Technologies, Inc.
On June 8, 1999, nStor Technologies, Inc., a Delaware corporation
("nStor"), purchased (the "Change in Control") 18,021,281 shares of the
Company's common stock, representing approximately 76% of the total issued and
outstanding common stock of the Company from W. David Sykes, President of the
Company ("Sykes"), the Sykes Family Trust and the Sykes Children's Trust.
As part of the purchase, nStor also acquired from Sykes the subordinated
promissory note (the "Shareholder Note") in the original principal amount of
$5,196,000 payable by the Company to Sykes.
On July 16, 1999 nStor acquired 1,612,903 shares of newly issued Andataco,
Inc. common stock from the Company for $0.5 million in cash, increasing nStor's
ownership to approximately 77%. On August 5, 1999, the Board of Directors of the
Company approved nStor's proposed acquisition of the remaining Andataco, Inc.
outstanding common stock for an aggregate purchase price of approximately $1.8
million, to be paid with shares of nStor common stock based on the average
closing price for the ten trading days immediately prior to the date of the
respective meetings of the stockholders of both companies. The proposed
acquisition is subject to various conditions, including approval by the
stockholders of both companies. The Company expects the closing to occur in the
fourth quarter of 1999. There can be no assurance, however, that the proposed
acquisition will be consummated.
IPL Systems, Inc.
On June 3, 1997 (the "Closing Date"), ANDA (formally IPL Systems, Inc.)
completed a business combination with ANDATACO of California, whereby ANDATACO
of California was merged with a wholly-owned subsidiary of ANDA (the "Merger").
Under the terms of the merger agreement, the shareholders of ANDATACO of
California were issued a total of 18,078,381 shares of ANDA Class A Common Stock
in exchange for all outstanding shares of capital stock of ANDATACO of
California. Although as a legal matter the Merger resulted in ANDATACO of
California becoming a wholly-owned subsidiary of ANDA, for financial reporting
purposes the Merger was treated as a recapitalization of ANDATACO of California
and an acquisition of ANDA by ANDATACO of California (reverse acquisition). The
financial reporting requirements of the Securities and Exchange Commission
require that the financial statements reported by ANDA subsequent to the Merger
be those of ANDATACO of California, which include the results of operations of
ANDA from the Closing Date.
6
ANDATACO, INC.
Notes to Consolidated financial statements (Unaudited)
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The acquisition of ANDA by ANDATACO of California was accounted for using the
purchase method. Accordingly, the purchase price was allocated to the estimated
fair market value of identifiable tangible and intangible assets acquired and
liabilities assumed. Based upon an independent valuation, the Company allocated
$2,400,000 to acquired in-process research and development for which there is no
future alternative use and $400,000 to existing proprietary technology for which
technological feasibility had been established. As required by generally
accepted accounting principles, the amount allocated to in-process research and
development was recorded as a one-time charge to operations and the amount
allocated to existing technology was amortized over its estimated useful life.
The excess of the purchase price over the identifiable net assets acquired of
$8,362,000 was recorded as goodwill and is being amortized on a straight-line
basis over its estimated useful life of five years.
NOTE 3 - NET LOSS PER SHARE
Basic earnings per share is computed based on the weighted average number
of shares of common stock outstanding during the period. Diluted earnings per
share is computed based on the weighted average number of shares of common stock
outstanding during the period increased by the weighted average number of common
stock equivalents outstanding during the period, using the treasury stock
method. Shares issuable upon exercise of outstanding stock options and warrants,
totaling 1,689,352 and 2,184,428 as of July 31, 1999 and 1998, respectively,
have been excluded from the computation of diluted earnings per share, as their
effect would be anti-dilutive.
NOTE 4 - INVENTORIES
JULY 31, OCTOBER 31,
1999 1998
---------- ----------
(unaudited)
Inventories are comprised of the following:
Purchased components ................................................................... $4,515,000 $3,900,000
Work in progress ..................................................................... 29,000 280,000
Finished goods ......................................................................... 401,000 743,000
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$4,945,000 $4,923,000
========== ==========
NOTE 5 - BORROWINGS
The Company has a revolving line of credit (the "Line of Credit") with a
bank which 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 Line of Credit currently
bears interest at prime plus 0.5 percent (8.5% at July 31, 1999), is guaranteed
by Sykes and matures in December 2002. The Company pays a facility fee of 0.25%
based on the average unused portion of the maximum borrowings. Advances under
the Line of Credit are collateralized by substantially all assets of the
Company. The Line of Credit provides for certain financial covenants, including
maintaining a certain minimum working capital and tangible net worth. During the
second quarter ended April 30, 1999, the Company 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 $0.5 million in connection with the sale of the Company's
common stock (Note 2).
7
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the unaudited
consolidated financial statements included elsewhere within this quarterly
report. Fluctuations in annual and quarterly results may occur as a result of
factors affecting demand for the Company's products such as the timing of the
Company's and competitors' new product introductions and upgrades. Due to such
fluctuations, historical results and percentage relationships are not
necessarily indicative of the operating results for any future period.
The discussion contained in this report contains forward-looking statements
based on the current expectations of the Company's management. Such statements
are subject to certain risks and uncertainties that could cause actual results
to differ materially from those projected. Factors that could cause or
contribute to such differences include but are not limited to, fluctuations in
the Company's operating results, continued new product introductions by the
Company, market acceptance of the Company's new product introductions, new
product introductions by competitors, technological changes in the computer
storage industry and other factors referred to herein, including but not limited
to, the factors discussed below and in the Company's Annual Report on Form 10-K.
Readers are cautioned not to place undue reliance on these forward-looking
statements which speak only as of the date hereof. The Company undertakes no
obligation to publicly release the result of any revisions to these forward-
looking statements which may be made to reflect events or circumstances
occurring after the date hereof or to reflect the occurrence of unanticipated
events.
Overview
The Company designs, develops, manufactures, markets and supports high
performance, high availability information storage solutions for the open
systems markets in the Windows NT and UNIX environments including Sun
Microsystems, Inc., Hewlett-Packard Company, Silicon Graphics, Inc., and NT-
based computing systems. The Company's fully integrated hierarchy of data
storage solutions includes fault-tolerant Redundant Array of Independent Disks
("RAID") and RAID-ready disk storage, tape backup and restore products and data
storage management software. The Company also provides technical support and
professional services for its products. The Company distributes internally
developed products and products from other manufacturers through a network of
sales offices worldwide and through distributors in Europe, Asia, Latin America,
Canada and Australia. The customers for the Company's products represent a
variety of industries and government agencies operating in distributed
client/server as well as centralized computing environments. These customers
range in size from FORTUNE 1000 companies to small businesses, and from national
to local governments.
On June 8, 1999, nStor Technologies, Inc., ("nStor"), purchased 18,021,281
shares of the Company's common stock from W. David Sykes, President of the
Company ("Sykes"), the Sykes Family Trust and the Sykes Children's Trust,
representing approximately 76% of the total issued and outstanding common stock
of the Company.
As part of the purchase, nStor also acquired from Sykes the subordinated
promissory note (the "Shareholder Note") in the original principal amount of
$5,196,000 payable by the Company to Sykes.
On July 16, 1999 nStor acquired 1,612,903 shares of newly issued Andataco,
Inc. common stock from the Company for $0.5 million in cash, increasing nStor's
ownership to approximately 77%. On August 5, 1999, the Board of Directors of
the Company approved nStor's proposed acquisition of the remaining Andataco,
Inc. outstanding common stock for an aggregate purchase price of approximately
$1.8 million, to be paid with shares of nStor common stock based on the average
closing price for the ten trading days immediately prior to the date of the
respective meetings of the stockholders of both companies. The proposed
acquisition is subject to various conditions, including approval by the
stockholders of both companies. The Company expects the closing to occur in the
fourth quarter of 1999. There can be no assurance, however, that the proposed
acquisition will be consummated.
8
RESULTS OF OPERATIONS
The following table sets forth items in the Company's statement of
operations as a percentage of net sales for the periods presented. The data has
been derived from the unaudited condensed consolidated financial statements.
THREE MONTHS ENDED NINE MONTHS ENDED
JULY 31, JULY 31,
------------------ -----------------
1999 1998 1999 1998
---- ---- ---- ----
Sales ....................................... 100.0% 100.0% 100.0% 100.0%
Cost of sales ............................... 71.7 74.5 71.4 70.2
---- ---- ---- ----
Gross profit ................................ 28.3 25.5 28.6 29.8
---- ---- ---- ----
Operating expenses:
Selling, general and administrative ........ 30.8 31.1 30.4 29.7
Rent expense to shareholder ................ 0.6 0.5 0.5 0.4
Research and development ................... 1.0 3.3 1.4 2.5
---- --- --- ---
Total operating expenses .................... 32.4 34.9 32.3 32.6
---- ---- ---- ----
Loss from operations ........................ (4.1) (9.4) (3.7) (2.8)
Net benefit on settlement of litigation (0.5) - (0.1) -
Interest expense ............................ 1.8 1.5 1.6 1.3
--- --- --- ---
Net loss .................................... (5.4)% (10.9)% (5.2)% (4.1)%
===== ===== ==== ====
Third Quarter of Fiscal 1999 Compared to Third Quarter of Fiscal 1998
Sales. Sales for the three months ended July 31, 1999 were $14,486,000, a
decrease of 15.2% from sales of $17,092,000 for the same period in the prior
year. The decrease was partly attributable to a decrease in sales of the
Company's GigaRAID product family. GigaRAID product sales were $6,149,000 in the
third quarter of fiscal 1999 compared to $7,235,000 in the third quarter of
fiscal 1998. This decrease is primarily attributable to the increase in
GigaRAID/AA product revenue not exceeding decreases experienced in other
GigaRAID products, primarily the GigaRAID/FT and GigaRAID/SA. The decrease is
also attributable to lower revenues from the Company's GigaSTOR product line
which decreased $1,217,000 or 24.2% to $3,820,000 in the third quarter of fiscal
1999. This decrease is primarily attributable to the increase in revenues from
GigaSTOR products incorporating LVD technology not outpacing the decrease in
revenues from non-LVD GigaSTOR products.
Third-party product sales decreased by $586,000, to $3,063,000 in the third
quarter of fiscal 1999 compared to $3,649,000 in the third quarter of fiscal
1998. The decrease in third-party product revenues is consistent with the
Company's transition towards "owned solutions" - strategic technologies designed
in-house to create technical, time-to-market and gross margin advantages.
Gross Profit. Gross profit in the third quarter of fiscal year 1999 was
$4,105,000, representing approximately 28.3% of revenues, compared to $4,359,000
in the third quarter of fiscal 1998, which represented approximately 25.5% of
revenues. The increase in gross profit as a percentage of sales was due to a
shift in product mix and dynamic market pricing experienced in the quarter. The
Company's GigaRAID product family sales accounted for 42.4% of revenues for the
third quarter of fiscal 1999 compared to 42.3% of revenues in the third quarter
of fiscal 1998. Non-GigaRAID mass storage accounted for 26.4% of revenues for
the third quarter of fiscal 1999 compared to 29.5% of revenues in the third
quarter of fiscal 1998. Distribution products accounted for 21.1% of revenues
for the third quarter of fiscal 1999 compared to 21.3% of revenues in the third
quarter of fiscal 1998. The Company has historically earned higher margins on
revenues from the GigaRAID product family as compared to non-GigaRAID mass
storage products.
9
Selling, General and Administrative Expense. Selling, general and
administrative expenses consist primarily of the salaries, commissions and
benefits of sales, marketing and customer support personnel and administrative
and corporate services personnel, as well as consulting, advertising, promotion,
and certain merger related expenses (i.e., goodwill amortization). Selling,
general and administrative expenses were $4,468,000 and $5,325,000 for the
quarters ended July 31, 1999 and 1998, respectively. The decrease in the current
period's selling, general and administrative expenses over such expenses
incurred in the comparable period of the prior fiscal year is due to decreased
compensation-related sales costs resulting from decreased staff and lower sales
volume.
Research and Development Expense. Research and development expenses consist
primarily of salaries, employee benefits, overhead and outside contractors. Such
expenses were $145,000 and $568,000 for the quarters ended July 31, 1999 and
1998, respectively. The decrease in research and development expenses for the
quarter ended July 31, 1999 as compared to the same quarter in the prior fiscal
year was primarily related to the completion of development of the Hewlett-
Packard SureTape(R) product during the third quarter of fiscal 1998. No further
expenses related to this project were incurred in fiscal year 1999. The Company
will to continue to focus resources on maintenance of in-house products and
differentiating technologies for which it believes there is a need in the
market. However, there can be no assurance that product development programs
invested in by the Company will be successful or that products resulting from
such programs will achieve market acceptance.
First Nine Months of Fiscal 1999 Compared to First Nine Months of Fiscal 1998
Sales. Sales for the nine months ended July 31, 1999 were $45,856,000, a
decrease of 23.4% from sales of $59,848,000 for the same period in the prior
year. The decrease was primarily attributable to a decrease in sales of third-
party distribution products. Third-party distribution product sales decreased by
$7,539,000, from $8,675,000 in the first nine months of fiscal 1999 compared to
$16,214,000 in the first nine months of fiscal 1998. The decrease in third-party
product sales is consistent with the Company's strategy to focus increased
resources on internally designed products, including the GigaRAID product
family, capable of producing higher margins. The decrease was also attributed to
lower manufactured and distributed GigaRAID and mass storage product sales.
GigaRAID product sales were $21,733,000 in the first nine months of fiscal 1999
compared to $25,831,000 in the first nine months of fiscal 1998. This decrease
is primarily attributable to the increase in GigaRAID/AA product revenue not
exceeding decreases experienced in other GigaRAID products, primarily the
GigaRAID/FT, GigaRAID/SA and GigaRAID/HA. The decrease was also attributable to
a decrease in sales of non-GigaRAID mass storage products including RAID Lite,
RAPID-Tape, JBOD Disk and JBOT Tape. Non-GigaRAID mass storage product sales
were $10,670,000 in the first nine months of fiscal 1999 compared to $14,492,000
in the first nine months of fiscal 1998. These decreases are consistent with the
Company's transition towards "owned solutions" - strategic technologies designed
in-house to create technical, time-to-market and gross margin advantages.
Gross Profit. Gross profit in the first nine months of fiscal year 1999 was
$13,100,000, representing approximately 28.6% of revenues, compared to
$17,815,000 in the first nine months of fiscal 1998, which represented
approximately 29.8% of revenues. The decrease in gross profit as a percentage of
sales was due primarily to a change in product mix within the GigaRAID product
family and the impact of dynamic market pricing experienced during the nine
months ended July 31, 1999. Distribution GigaRAID products, which have
traditionally earned lower margins than internally designed and manufactured
GigaRAID products, increased 3.0% as a percentage of sales during the first nine
months of fiscal 1999 compared to the same period in the prior fiscal year. The
Company's GigaRAID product family sales accounted for 47.4% of revenues for the
first nine months of fiscal 1999 compared to 43.2% of revenues in the first nine
months of fiscal 1998.
Selling, General and Administrative Expense. Selling, general and
administrative expenses consist primarily of the salaries, commissions and
benefits of sales, marketing and customer support personnel and administrative
and corporate services personnel, as well as consulting, advertising, promotion,
and certain merger related expenses (i.e., goodwill amortization). Selling,
general and administrative expenses were $13,900,000 and $17,788,000 for the
nine months ended July 31, 1999 and 1998, respectively. The
10
decrease in the current period's selling, general and administrative expenses
over such expenses incurred in the comparable period of the prior fiscal year is
due to decreased compensation-related sales costs resulting from decreased staff
and lower sales volume.
Research and Development Expense. Research and development expenses consist
primarily of salaries, employee benefits, overhead and outside contractors. Such
expenses were $651,000 and $1,482,000 for the nine months ended July 31, 1999
and 1998, respectively. The decrease in research and development expenses for
the nine months ended July 31, 1999 as compared to the same period in the prior
fiscal year was primarily related to the completion of development of the
Hewlett-Packard SureTape(c) product during the third quarter of fiscal 1998. No
further expenses related to this project were incurred in fiscal year 1999. The
Company will continue to focus resources on maintenance of in-house products and
differentiating technologies for which it believes there is a need in the
market. However, there can be no assurance that product development programs
invested in by the Company will be successful or that products resulting from
such programs will achieve market acceptance.
Interest Expense. The decrease in interest expense of $33,000 to $746,000
in the first nine months of fiscal 1999 from $779,000 in the comparable period
in fiscal 1998 is due primarily to the reduction in the outstanding portion of
the Company's bank line of credit.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash remained at $23,000 as of July 31, 1999 and as of
October 31, 1998. Net working capital increased $546,000 to $4,032,000 as of
July 31, 1999 from $3,486,000 as of October 31, 1998. During the first nine
months of fiscal 1999, the Company used $347,000 in operating activities and
invested $484,000 in property and equipment and produced $831,000 from net
borrowings with its bank line of credit and proceeds from issuing shares of
common stock.
The Company currently maintains a credit facility that permits borrowings
of the lesser of $10,000,000 or a percentage of eligible accounts receivable and
inventory ($7,203,000 available at July 31, 1999). As of July 31, 1999, the
Company had $5,793,000 outstanding under this credit line. The credit facility
expires in December 2002; consequently borrowings under this line have been
classified as long-term.
The Company believes that its projected income and its bank line of credit
will be sufficient to meet the Company's capital and operating requirements for
the next twelve months as presently projected. If sales are less than projected,
or if the Company is unable to generate adequate cash flows from its sales, the
Company may need to seek additional sources of capital and/or decrease its
planned capital and operating expenditures.
A shareholder loan to the Company's principal shareholder is unsecured, due
in June 2004, with interest payable monthly at 9 percent per annum. This loan is
subordinate to the bank line of credit.
INCOME TAXES
The Company records a provision (benefit) for income taxes using the
liability method. Current income tax expense or benefit represents the amount of
income taxes expected to be payable or refundable for the current year. A
deferred income tax liability or asset is established for the expected future
consequences resulting from the differences between the financial reporting and
income tax bases of assets and liabilities and from net operating loss and
credit carryforwards. Deferred income tax expense or benefit represents the net
change during the year in the deferred income tax liability or asset. A
valuation allowance is established when necessary to reduce deferred tax assets
to the amounts expected to be more likely than not realized.
YEAR 2000
Many current computer systems and software products were not designed to
handle any dates beyond the year 1999. As a result, computer systems and/or
software used by many companies may need to be
11
modified prior to the Year 2000 in order to remain functional. Significant
uncertainty exists in the hardware and software industry concerning the
potential effects associated with such compliance.
In mid-1997, the Company formed an internal task force to evaluate those
areas of the Company that may be affected by the Year 2000 problem and devised a
plan for the Company to become Year 2000 compliant in a timely manner (the
"Plan"). The Plan focuses on three major areas: the Company's mission critical
business transaction systems; the products the Company sells; and the issues
associated with its business partners, including suppliers, customers and
bankers.
Costs incurred directly related to the Year 2000 problem are expensed by
the Company during the period in which they are incurred. The Company has
incurred to date no incremental material costs associated with its efforts to
become Year 2000 compliant, as a majority of the costs have occurred as a result
of normal upgrade procedures. Costs incurred relating to the Year 2000 issue
include the time spent by employees reviewing and addressing Year 2000 risks and
amounted to $20,000 in fiscal 1998 and $10,000 for the first nine months of
fiscal 1999.
Based on current information, the Company does not expect future costs to
address Year 2000 risks to be material. However, there can be no assurances that
there will not be interruptions or other limitations of financial or operating
systems or that the Company will not incur significant costs to avoid such
interruptions or limitations. The Company's expectations about future costs
associated with the Year 2000 problem are subject to uncertainties that could
cause actual results to have a greater financial impact than currently
anticipated. Factors that could influence the amount and timing of future costs
include but are not limited to the success of the Company's suppliers in
completing their respective plan of action for Year 2000 compliance.
Mission Critical Business Transaction Systems
The Company has completed a review of its critical business transaction
systems, and its Year 2000 compliance related to business transaction systems is
as follows:
All of the Company's systems for processing business transactions are Year
2000 compliant and the Company expects that these systems will correctly process
transactions prior to and following 12:00 am January 1, 2000. This compliance
extends to the underlying hardware, operating systems, and other software on
which the Company's business systems operate. This compliance includes the
following transactions and related printed documents: accepting orders from
customers, fulfilling customer orders, invoicing customers, crediting customer
accounts, applying customer payments, refunding customers, placing orders with
vendors, receiving vendor shipments, processing vendor invoices and paying
vendors.
The Company is in the process of evaluating certain ancillary PC office
applications (e.g. word processing, spreadsheets, e-mail etc.) and specialized
PC applications including art, drawing and other creative department
applications, hardware design and other engineering department applications,
software development systems, bank account management, fixed asset management,
and stock option database management. This effort will continue through 1999 and
is expected to be completed by the end of the calendar year 1999.
Products the Company Sells
The Company has also completed a review of all significant products the
Company sells for Year 2000 compliance. All significant products that the
Company currently sells are Year 2000 compliant and the Company believes these
products will not produce date errors in changing from the year 1999 to 2000.
Any products the Company intends to sell in the future will be reviewed for Year
2000 compliance. The functionality of all of these products, however, are
dependent on the software compliance of the underlying operating systems.
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The Company's Business Partners
The Company's suppliers (particularly sole-source and long lead-time
suppliers), key customers and other key business partners (e.g. bankers) may be
adversely affected by their respective failure to address the Year 2000 problem.
Should any of the Company's suppliers encounter Year 2000 problems that cause
them to delay manufacturing or shipments of key components to the Company, the
Company may be forced to delay or cancel shipments of its products, which could
have a material adverse effect on the Company's results of operations. Any
inability of the Company's key customers to become Year 2000 compliant which
would cause them to delay or cancel substantial purchase orders or delivery of
the Company's products could also have a material adverse effect on the
Company's results of operations. Additionally, any inability of the Company's
other key business partners, including the Company's bank, to become Year 2000
compliant could cause them to become unable to provide critical business
services, such as to provide funding on the Company's line of credit, and could
therefore also have a material adverse effect on the Company.
The Company does not rely on any one significant customer (i.e.
representing greater than 10% of total revenue). However, it is unknown how
customer spending patterns may be impacted by Year 2000 programs. As customers
focus on preparing their businesses for the Year 2000 in the near term, capital
budgets may be spent on remediation efforts, potentially delaying the purchase
and implementation of new systems, thereby creating less demand for the
Company's products and services. This could adversely affect the Company's
business. Conversely, demand for the Company's products could accelerate as
customers focus on the need to protect their stored data by enhancing their
capabilities.
The Company has contacted all identified key vendors and business partners
and obtained either a statement of Year 2000 compliance or a status report on
the progress achieved to date on execution of their respective Year 2000 Plan.
Based on this review, the Company is satisfied that all identified key vendors
and business partners have satisfactorily addressed their Year 2000 issues with
a plan of action as applicable and are, or will be, Year 2000 compliant by the
end of the third calendar quarter of 1999. However, there can be no assurance
that the representations made to the Company by third parties are accurate or
complete and there is a possibility that normal business operations could be
disrupted.
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PART II - OTHER INFORMATION
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K.
---------------------------------
(a) Exhibits
2.1 Agreement and Plan of Merger dated as of August 27, 1999, by
and among nStor Technologies, Inc., NTI Acquisition Corp. and
Andataco, Inc.
10.1 Amendment No.4 to Loan Agreement dated as of July 13, 1999
between Wells Fargo Bank and the Company.
10.2 Subordination Agreement dated July 13, 1999 between ANDATACO of
California, Inc., nStor Technologies, Inc. and Wells Fargo
Credit.
27.1 Financial Data Schedule
(b) Reports on Form 8-K
Report on Form 8-K dated June 8, 1999, containing information related
to nStor Technologies, Inc.'s acquisition of 76% of Andataco, Inc.'s
common stock.
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ANDATACO, INC.
Date: September 14, 1999 By: /s/ Harris Ravine
-----------------------------------
Harris Ravine
Chief Executive Officer
(on behalf of registrant and as its
principal executive officer)
Date: September 14, 1999 By: /s/ Diane Wong
-----------------------------------
Diane Wong
Vice President of Finance and
Corporate Controller
(on behalf of registrant and as its
principal financial officer)
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