-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AHwBJ5Jmzn92nGZ2tMwf/UnTpoITnsxdNX81vVwxfCon8XPZlllYNlp450WhHAWx gjFuBADt1iv7bqinUomzTw== 0000075448-02-000032.txt : 20020813 0000075448-02-000032.hdr.sgml : 20020813 20020813153943 ACCESSION NUMBER: 0000075448-02-000032 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020301 ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 20020813 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NSTOR TECHNOLOGIES INC CENTRAL INDEX KEY: 0000075448 STANDARD INDUSTRIAL CLASSIFICATION: [9995] IRS NUMBER: 952094565 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-12895 FILM NUMBER: 02729605 BUSINESS ADDRESS: STREET 1: 100 CENTURY BLVD. CITY: WEST PALM BEACH STATE: FL ZIP: 33417 BUSINESS PHONE: 5616403125 MAIL ADDRESS: STREET 1: 100 CENTURY BLVD. CITY: W. PALM BEACH STATE: FL ZIP: 33417 FORMER COMPANY: FORMER CONFORMED NAME: IMGE INC /DE/ DATE OF NAME CHANGE: 19940525 FORMER COMPANY: FORMER CONFORMED NAME: IMNET INC /DE/ DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: IMGE INC DATE OF NAME CHANGE: 19960627 8-K/A 1 fom8ka.txt FORM 8-K/A DATED AUGUST 13, 2002 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K/A Current Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 August 13, 2002 --------------- Date of Filing of Form 8-K March 1, 2002 ------------- Date of Report (Date of earliest event reported) nSTOR TECHNOLOGIES, INC. ------------------------ (Exact Name of Registrant as Specified in its Charter) DELAWARE 0-8354 95-2094565 -------- ------ ----------- (State or other jurisdiction (Commission File Number) (IRS Employer of incorporation) Identification No.) 10140 MESA RIM ROAD SAN DIEGO, CALIFORNIA 92121 --------------------------- (Address of principal executive offices) (858) 453-9191 -------------- (Registrant's telephone number, including area code) N/A --- (Former name or former address, if changed since last report) 2 This Form 8-K/A amends the information contained in Item 7 of the Form 8-K filed by the Registrant with the Commission on June 21, 2002. Item 7. Financial Statements, Pro Forma Financial Information and Exhibits a) Financial Statements of Business Acquired Report of Independent Accountants dated March 22, 2002 and the accompanying balance sheets of Stonehouse Technologies, Inc. as of December 31, 2001 and 2000, and the related statements of operations, stockholders' equity and cash flows for the two years ended December 31, 2001 and 2000 Balance sheet of Stonehouse Technologies, Inc. as of March 31, 2002 and the related statements of operations and cash flows for the three months ended March 31, 2002 (unaudited) b) Pro Forma Financial Information nStor Technologies, Inc. and Subsidiaries Unaudited Proforma Condensed Combined Financial Statements c) Exhibits None SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. nStor Technologies, Inc. /s/ Jack Jaiven ---------------------------- Jack Jaiven Vice President and Treasurer 3 Stonehouse Technologies, Inc. Report of Independent Accountants and Financial Statements December 31, 2001 and 2000 and for the Years ended December 31, 2001 and 2000 4 Independent Auditors' Report To the Board of Directors of Stonehouse Technologies, Inc. We have audited the accompanying balance sheets of Stonehouse Technologies, Inc. (the "Company") as of December 31, 2001 and 2000 and the related statements of operations, stockholder's equity and cash flows for the years then ended. 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 auditing standards generally accepted in the United States of America. 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 financial statements referred to above present fairly, in all material respects, the financial position of Stonehouse Technologies, Inc. at December 31, 2001 and 2000, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. /s/ BDO Seidman, LLP Los Angles, California March 22, 2002 5 Stonehouse Technologies, Inc. Balance Sheets December 31, 2001 2000 - -------------------------------------------------------------------------------- Assets Current assets Cash $ 411,394 $ 819,135 Accounts receivable, net of allowance for doubtful accounts of $76,940 and $86,565, respectively 1,041,980 1,051,418 Receivable from affiliate (Note 7) 313,344 1,298,596 Inventory - 18,780 Prepaid expenses 108,306 160,136 ------------------------------------------------------------------------------- Total current assets 1,875,024 3,348,065 ------------------------------------------------------------------------------- Property and equipment, net (Note 3) 177,534 130,516 Deferred tax asset (Note 5) 524,394 524,394 Goodwill, net of accumulated amortization of $656,409 and $455,156, respectively 4,880,392 5,081,646 ------------------------------------------------------------------------------- $7,457,344 $9,084,621 =============================================================================== Liabilities and Stockholder's Equity Current liabilities Accounts payable and accrued liabilities $ 860,211 $ 600,407 Deferred revenue 1,861,077 2,060,603 Payable to affiliates 5,341 3,097 Line of credit (Note 4) 200,000 - ------------------------------------------------------------------------------- Total current liabilities 2,926,629 2,664,107 ------------------------------------------------------------------------------- Commitments and contingencies (Notes 8 and 9) Stockholder's Equity (Note 6) Common stock - no par value; 25,000,000 shares authorized 16,000,000 shares issued and outstanding - - Additional paid-in capital 7,567,139 6,627,139 Accumulated deficit (3,036,424) (206,625) ------------------------------------------------------------------------------- Total stockholder's equity 4,530,715 6,420,514 ------------------------------------------------------------------------------- $7,457,344 $9,084,621 =============================================================================== See accompanying notes to financial statements. 6 Stonehouse Technologies, Inc. Statements of Operations Years ended December 31, 2001 2000 - -------------------------------------------------------------------------------- Revenues $ 6,608,049 $ 7,269,550 Cost of sales, including depreciation of $57,444 and $107,531, respectively 3,698,892 4,083,705 - -------------------------------------------------------------------------------- Gross margin 2,909,157 3,185,845 - -------------------------------------------------------------------------------- Operating expenses Other operating expenses 2,630,993 902,924 Sales and marketing expenses 1,972,900 1,141,948 Research and development 939,776 1,188,944 Goodwill amortization 201,253 201,253 - -------------------------------------------------------------------------------- 5,744,922 3,435,069 - -------------------------------------------------------------------------------- Operating loss (2,835,765) (249,224) Other (income) and expense Interest expense - (38) Interest income 5,966 20,162 - -------------------------------------------------------------------------------- 5,966 20,124 - -------------------------------------------------------------------------------- Loss before income taxes (2,829,799) (229,100) Income tax (benefit) (Note 5) - (1,000) - -------------------------------------------------------------------------------- Net loss $(2,829,799) $ (228,100) ================================================================================ See accompanying notes to financial statements. 7 Stonehouse Technologies, Inc. Statement of Stockholders' Equity Additional Retained Common Paid-in Earnings Stock Capital (Deficit) Total ------------------------------------------------------------------------------- Balance, January 1, 2000 $ - $6,627,139 $ 21,475 $6,648,614 Net loss - - (228,100) (228,100) ------------------------------------------------------------------------------- Balance, December 31, 2000 - 6,627,139 (206,625) 6,420,514 Contributed capital from Pacific USA - 920,000 - 920,000 Stock compensation due to issuance of warrants - 20,000 - 20,000 Net loss - - (2,829,799) (2,829,799) ------------------------------------------------------------------------------- Balance, December 31, 2001 $ - $7,567,139 $(3,036,424) $4,530,715 ================================================================================ See accompanying notes to financial statements. 8 Stonehouse Technologies, Inc. Statements of Cash Flows Increase (Decrease) in Cash Years ended December 31, 2001 2000 - -------------------------------------------------------------------------------- Cash flows from operating activities Net loss $(2,829,799) $ (228,100) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Issuance of warrants for services rendered 20,000 - Depreciation and amortization 287,191 320,077 Deferred income taxes - (1,000) Changes in operating assets and liabilities: Accounts receivable 9,438 551,057 Receivable from affiliate 987,496 - Inventory 18,780 9,280 Prepaid expenses 51,830 45,204 Accounts payable and accrued liabilities 259,804 (58,896) Deferred revenue (199,526) (78,542) - -------------------------------------------------------------------------------- Net cash provided by (used in) operating activities (1,394,786) 559,080 - -------------------------------------------------------------------------------- Cash flows from investing activities Purchase of property and equipment (132,955) (67,852) - -------------------------------------------------------------------------------- Net cash used in investing activities (132,955) (67,852) - -------------------------------------------------------------------------------- Cash flows from financing activities Advances to affiliates, net - (5,232) Capital contributions 920,000 - Advances to parent - (1,298,596) Borrowings on line of credit 200,000 - - -------------------------------------------------------------------------------- Net cash provided by (used in) financing activities 1,120,000 (1,303,828) - -------------------------------------------------------------------------------- Decrease in cash (407,741) (812,600) Cash, beginning of year 819,135 1,631,735 - -------------------------------------------------------------------------------- Cash, end of year $ 411,394 $ 819,135 ================================================================================ Supplementary disclosure of cash flow information Cash paid for: Interest $ - $ 38 ================================================================================ See accompanying notes to financial statements. 9 Stonehouse Technologies, Inc. Notes to Financial Statements 1. Organization and Business Stonehouse Technologies, Inc. ("Stonehouse" or the "Company") is engaged in the design, sale (of both product and subscription service), maintenance and support of telecommunications management software. The Company also provides consulting services and sells computer hardware in conjunction with software sales, primarily in the United States. On April 1, 1996, all of the Company's outstanding capital stock was acquired by Pacific Technology Services, Inc. ("PTS"), a wholly-owned subsidiary of Pacific Technology Group, Inc. ("PTG"), which is 100% owned by Pacific USA Holdings Corp. ("Pacific USA"). In March 2000, PTS sold 20% of its interest in the Company to Venturelink Holdings, a majority-owned subsidiary of Pacific USA. During 2001, PTS transferred its remaining 80% interest in the Company to PTG. The ultimate parent company is Pacific Electric Wire & Cable Company, Ltd. ("PEWC") based in Taiwan. During 2001, the Company experienced significant changes in its top management. In connection with these changes, throughout most of 2001, the Company's expenses were significantly higher than normal, pursuant to the expansion plans implemented by new management. Prior to December 31, 2001, the Company determined that these new plans were not in the best interest of the Company. As a result, the Company's previous CEO reassumed the CEO duties and has committed to bring expenses in line with revenues. The Company's management believes that the Company will be self-sustainable in the near future. However, the Company's parent, Pacific USA Holdings Corp, is substantially dependent on continued financial support from PEWC. PEWC has committed to provide continued financial support to Pacific USA and its subsidiaries, including Stonehouse, for at least another year and one day from the auditors report date. 2. Summary of Significant Accounting Policies Revenue Recognition Revenues from computer software sales are recognized upon execution of a contract and shipment of the software provided that the product is accepted by the customer. Consulting revenues are recognized when services are performed. Revenues on long-term development contracts are deferred at time of sale, and using the percentage-of-completion method are recognized based upon hours incurred as a percentage of estimated total hours. Maintenance revenues for customer support and product updates are deferred at the time of sale and are included in income on a pro-rata basis over the term of the maintenance agreement. Property and Equipment Property and equipment are recorded at cost less accumulated depreciation and amortization. Depreciation and amortization are computed on a straight-line basis over the estimated useful lives of the respective assets, ranging from three to seven years. 10 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 period. Actual results could differ from those estimates. The Company reviews all significant estimates affecting the financial statements on a recurring basis and records the effect of any necessary adjustments prior to their issuance. Reclassification Certain changes in classification have been made to the prior year's consolidated financial statements to conform to the current presentation. Goodwill The excess of cost over the fair value of net assets acquired was recorded as goodwill and is amortized on a straight-line basis over thirty years. The Company assesses the recoverability of this intangible asset by determining whether the amortization of the goodwill balance over its remaining life can be recovered through undiscounted future operating cash flows of the acquired operation. The amount of goodwill impairment, if any, is measured based on projected discounted future operating cash flows using a discount rate reflecting the Company's average cost of funds. The assessment of the recoverability of goodwill will be impacted if estimated future operating cash flows are not achieved. Stock-Based Compensation The Company accounts for employee stock options or similar equity instruments in accordance with Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"). SFAS No. 123 defines a fair-value-based method of accounting for employee stock options or similar equity instruments. This statement gives entities a choice to recognize related compensation expense by adopting the new fair-value method or to measure compensation using the intrinsic value method under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25"), the former standard. If the former standard for measurement is elected, SFAS No. 123 requires supplemental disclosure to show the effect of using the new measurement criteria. The Company currently uses the disclosure standards of SFAS 123 but accounts for stock based compensation using APB 25. Income Taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. 11 The Company files as part of a consolidated federal income tax return with Pacific USA. The Company and Pacific USA have entered into a tax sharing agreement whereby taxes are computed as if the Company filed a separate tax return. Such agreement allows Pacific USA to utilize all net operating tax losses realized by the Company. New Accounting Pronouncements In June 2001, the Financial Accounting Standards Board finalized FASB Statements No. 141, Business Combinations (SFAS 141), and No. 142, Goodwill and Other Intangible Assets (SFAS 142). SFAS 141 requires the use of the purchase method of accounting and prohibits the use of the pooling-of-interests method of accounting for business combinations initiated after June 30, 2001. SFAS 141 also requires that the Company recognize acquired intangible assets apart from goodwill if the acquired intangible assets meet certain criteria. SFAS 141 applies to all business combinations initiated after June 30, 2001 and for purchase business combinations completed on or after July 1, 2001. It also requires, upon adoption of SFAS 142, that the Company reclassify the carrying amounts of intangible assets and goodwill based on the criteria in SFAS 141. SFAS 142 requires, among other things, that companies no longer amortize goodwill, but instead test goodwill for impairment at least annually. In addition, SFAS 142 requires that the Company identify reporting units for the purposes of assessing potential future impairments of goodwill, reassess the useful lives of other existing recognized intangible assets, and cease amortization of intangible assets with an indefinite useful life. An intangible asset with an indefinite useful life should be tested for impairment in accordance with the guidance in SFAS 142. SFAS 142 is required to be applied in fiscal years beginning after December 15, 2001 to all goodwill and other intangible assets recognized at that date, regardless of when those assets were initially recognized. SFAS 142 requires the Company to complete a transitional goodwill impairment test six months from the date of adoption. The Company is also required to reassess the useful lives of other intangible assets within the first interim quarter after adoption of SFAS 142. The Company has not determined the impact of adopting SFAS 141 or SFAS 142. The October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS 144 requires that these long-lived assets be measured at the lower of carrying amount or fair value less cost to sell, whether reported in continuing operations or in discontinued operations. Therefore, discontinued operations will no longer be measured at net realizable value or include amounts for operating losses that have not yet occurred. SFAS 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001 and, generally, are to be applied prospectively. The Company believes the adoption of this statement will have no material impact on its financial statements. 3. Property and Equipment Property and equipment are summarized as follows at December 31: December 31, 2001 2000 ------------------------------------------------------------------------- Office equipment $ 32,420 $ 20,144 Furniture and fixtures 63,919 91,496 Transportation equipment 56,576 45,620 Computer equipment and software 217,556 641,162 Leasehold improvements 3,338 - ------------------------------------------------------------------------- 373,809 798,422 Accumulated depreciation and amortization (196,275) (667,906) ------------------------------------------------------------------------- $ 177,534 $ 130,516 ========================================================================= 12 4. Line of Credit The Company has a $500,000 revolving line of credit with a bank payable upon demand, bearing interest at a rate of the bank's prime rate plus 1%. Amounts borrowed pursuant to this line of credit are secured by accounts receivable and certain other assets of the Company and are guaranteed by Pacific USA. The outstanding principal at December 31, 2001 and 2000 was $200,000 and $0, respectively, with a corresponding interest rate of 5.75%. 5. Income Tax At December 31, 2001, the Company has net operating loss carry forwards of approximately $4,182,000 for federal income tax purpose, which expire through 2021. The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at December 31, 2001 consisted of $1,421,965 primarily from net operating loss carryforwards offset by a valuation allowance of $897,571, resulting in a net deferred tax asset of $524,394. Based on the ability of the Company to generate future taxable income through operations, management believes more likely than not that the Company will realize the benefits of the net deferred tax asset in future periods. 6. Transactions in Stockholders' Equity In February 2001, a 21.77226221-to-1 stock split in the form of a stock dividend was approved by the Board of Directors of the Company, which would have resulted in 5,000,000 common shares issued and outstanding. However, rights to receive 1,000,000 common shares were waived. Accordingly, only 4,000,000 shares were issued and outstanding after this split. In February 2001, a 4-to-1 stock split was also approved. After these splits (which were effected through stock dividends to existing shareholders at the date of the split) and waivers, there were 16,000,000 shares issued and outstanding and the prior year's common shares issued and outstanding has been retroactively restated. In February 2001, the Company's Board of Directors approved a stock option plan. The maximum number of shares that may be purchased pursuant to the plan is 3,800,000. Options granted under the plan are generally considered incentive stock options. However, to the extent that options become exercisable by any participant for shares having a fair market value in excess of $100,000, the portion of such options that exceeds such amount will be treated as non-statutory stock options. Options granted under the plan vest in equal monthly increments over a period of 4 years, with the first 3 months vesting 90 days after the grant date, and are exercisable for 7 years after the date of grant at an exercise price of $0.32 per share. The following table summarizes the activity under the Company's stock option plan: Price Number Per Year ended December 31, 2001 of Shares Share ------------------------------------------------------------------------- Options outstanding, beginning of year - $ - Granted 2,596,200 0.32 Cancelled/expired 1,546,140 0.32 ------------------------------------------------------------------------- Options outstanding, end of year 1,050,060 $ 0.32 ------------------------------------------------------------------------- Options exercisable, end of year 511,556 $ 0.32 ========================================================================= Weighted average fair value of options granted $ 0.10 ========================================================================= 13 All outstanding options were granted on February 19, 2001 and, as of December 31, 2001, had a remaining contractual life of 6.13 years. The Company has elected to account for its stock-based compensation plans under APB No. 25 and has therefore recognized no compensation expense in the accompanying consolidated financial statements for stock-based employee awards granted as the exercise price for all employees options was equal to the estimated fair value of the Company's common stock on the date of grant. Additionally, the Company has computed for pro forma disclosure purposes the value of all options granted during 2001, using the Black-Scholes option pricing model with the following weighted average assumptions: Risk free interest rate 5.23% Expected dividend yield - Expected lives 5 years Expected volatility 0% If the Company had accounted for its stock-based compensation plans using a fair value method of accounting, the Company's net loss would have been as follows for the year ended December 31, 2001: Net loss: As reported $ (2,829,799) Pro forma $ (2,869,177) The effects of applying SFAS No. 123 for providing pro forma disclosures for 2001 are not likely to be representative of the effects on reported net loss for future years, because options vest over several years and additional awards generally are made each year. 7. Related Party Transactions In 2000, the Company provided funds to PTS, resulting in a receivable of $1,298,596 at December 31, 2000. At December 31, 2001, this receivable has been reduced to $313,344. In March 2000, PUSA entered into a sale leaseback transaction, which involved certain subsidiary assets, including many fixed assets of the Company. Management has elected to disclose the sale leaseback transaction on the financials of PUSA, and continue to report these fixed assets and the related depreciation on the financials of the Company. In October 2000, the Company distributed its Monies - communications cost management software to Pacific USA. There was no carrying value associated with this software. 8. Benefit Plan The employees of the Company are covered under the Pacific USA Holdings Corp. 401(k) Savings Plan. Upon completion of certain eligibility requirements, employees are allowed to contribute up to 15% of their annual compensation. The Company matches 50% of such contributions up to 6%. Contributions by the Company totaled $70,508 for the year ended December 31, 2001. 14 9. Commitments and Contingencies Leases The Company leases office space and office equipment under a month-to-month arrangement with Pacific USA. Rent expense was approximately $406,013 and $267,000 for the years ended December 31, 2001 and 2000, respectively. The Company leases additional office space through 2002. The future minimum lease payments are $43,381 payable in 2002. Litigation The Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company's consolidated financial position. 10. Concentrations Approximately $2,789,266 and $3,771,000 of the Company's revenues were generated from three customers during 2001 and 2000, respectively. At December 31, 2001, one customer represents approximately 24% of the accounts receivable balance. From time to time, the Company maintains cash balances in excess of FDIC insured limits. The total cash balances are insured by the F.D.I.C. up to $100,000 per bank. The Company had cash balances on deposit that exceeded the balance insured by the F.D.I.C. in the amount of $405,632 at December 31, 2001. 11. Subsequent Events (Unaudited) Pacific USA signed a letter of intent with nStor Technologies, Inc. ("nStor"), dated March 21, 2002 and amended April 30, 2002, whereby Pacific USA intends to sell 100% of the fully-diluted capital stock of the Company to nStor. The purchase price will consist of 1,000 shares of preferred stock convertible into 27,027,027 shares of nStor common stock (based on a fixed stock price of $0.37 per share and a total purchase price of $10,000,000) plus additional common shares, not to exceed 8,687,258, contingent upon future net revenues exceeding a specified "threshold amount." The terms of the letter of intent are expected to be finalized later in a formal acquisition agreement. 15 Stonehouse Technologies, Inc. Financial Statements (unaudited) March 31, 2002 and for the three months ended March 31, 2002 16 Stonehouse Technologies, Inc. Balance Sheet March 31, 2002 (unaudited) (dollars in thousands) Assets ------ Current assets: Cash $ 425 Accounts receivable, net of allowances for doubtful accounts of $77 1,050 Receivable from affiliate 397 Prepaid expenses 125 ------- Total current assets 1,997 Property and equipment, net 156 Deferred tax asset 524 Goodwill, net of accumulated amortization of $656 4,880 ------- $ 7,557 ======= Liabilities and Stockholders' Equity ------------------------------------ Current liabilities: Line of credit $ 200 Accounts payable and accrued liabilities 1,004 Deferred revenue 1,564 Payable to affiliates 65 ------- Total current liabilities 2,833 ------- Commitments and contingencies Stockholders' equity: Common stock - no par value: 25,000,000 shares authorized; 16,000,000 shares issued and outstanding - Additional paid-in capital 7,567 Retained deficit (2,843) ------- Total stockholder's equity 4,724 ------- $ 7,557 ======= 17 Stonehouse Technologies, Inc. Statement of Income Three Months Ended March 31, 2002 (unaudited) (in thousands) Revenues $1,915 Cost of sales 911 ------- Gross margin 1,004 ------- Operating expenses Sales and marketing expenses 276 Research and development 196 Other operating expenses 338 ------- 810 ------- Operating income 194 Other (income) expense Interest income (3) Interest expense 3 ------- Income before income taxes 194 Income tax expense - ------- Net income $ 194 ======= 18 Stonehouse Technologies, Inc. Statement of Cash Flow Three Months Ended March 31, 2002 (unaudited) (in thousands) Cash flow from operating activities Net income $ 194 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 22 Changes in operating assets and liabilities: Accounts receivable 293 Prepaid expenses and other (16) Accounts payable and accrued liabilities 143 Deferred revenue (297) ------- Net cash provided by operating activities 339 ------- Cash flow from financing activities Advances to affiliates, net (325) ------- Net cash used in financing activities (325) ------- Increase in cash 14 Cash, beginning of period 411 ------- Cash, end of period $ 425 ======= Supplementary disclosure of cash flow information: Cash paid for interest $ 3 ======= 19 Notes to Financial Statements (unaudited) 1) Business Stonehouse Technologies, Inc. ("Stonehouse" or the "Company") is engaged in the design, sale (of both product and subscription service), maintenance and support of telecommunications management software. The Company also provides consulting services and sells computer hardware in conjunction with software sales, primarily in the United States. During 2001, the Company experienced significant changes in its top management. In connection with these changes, throughout most of 2001, the Company's expenses were significantly higher than normal, pursuant to the expansion plans implemented by new management. Prior to December 31, 2001, the Company determined that these new plans were not in the best interest of the company. As a result, the Company's previous CEO reassumed the CEO duties and has committed to bring expenses in line with revenues. 2) Significant Accounting Policies Revenue Recognition Revenues from computer software sales are recognized in accordance with Statement of Position 97-2, Software Revenue Recognition, and are recognized upon execution of a contract and shipment of the software, provided the product is accepted by the customer. Consulting revenues are recognized when services are performed. Revenues on long-term development contracts are deferred at time of sale, and using the percentage-of-completion method are recognized based upon hours incurred as a percentage of estimated total hours. Maintenance revenues for customer support and product updates are deferred at the time of sale and are included in income on a pro-rata basis over the term of the maintenance agreement. Goodwill The excess of cost over the fair value of net assets acquired was recorded as goodwill. Effective January 1, 2002, the Company implemented SFAS 142 which discontinued the amortization of unamortized goodwill (see Recent Authoritative Pronouncements). Recent Authoritative Pronouncements In June 2001, the Financial Accounting Standards Board finalized FASB Statements No. 141, Business Combinations (SFAS 141), and No. 142, Goodwill and Other Intangible Assets (SFAS 142). SFAS 141 requires the use of the purchase method of accounting and prohibits the use of the pooling-of-interests method of accounting for business combinations initiated after June 30, 2001. SFAS 141 also requires that the Company recognize acquired intangible assets apart from goodwill if the acquired intangible assets meet certain criteria. SFAS 141 applies to all business combinations initiated after June 30, 2001 and for purchase business combinations completed on or after July 1, 2001. It also requires, upon adoption of SFAS 142, that the Company reclassify the carrying amounts of intangible assets and goodwill based on the criteria in SFAS 141. 20 SFAS 142 requires, among other things, that companies no longer amortize goodwill, but instead test goodwill for impairment at least annually. In addition, SFAS 142 requires that the Company identify reporting units for the purposes of assessing potential future impairments of goodwill, reassess the useful lives of other existing recognized intangible assets, and cease amortization of intangible assets with an indefinite useful life. An intangible asset with an indefinite useful life should be tested for impairment in accordance with the guidance in SFAS 142. SFAS 142 is required to be applied in fiscal years beginning after December 15, 2001 to all goodwill and other intangible assets recognized at that date, regardless of when those assets were initially recognized. The Company has not determined the impact of adopting SFAS 141 or SFAS 142. 3. Bank Line of Credit The Company has a $500,000 revolving line of credit with a bank that is payable upon demand, and bears interest at the bank's prime rate plus 1%. Amounts borrowed pursuant to this line of credit are secured by accounts receivable and certain other assets of the Company and are guaranteed by an affiliate of the Company, Pacific USA Holdings Corp. ("Pacific"). The outstanding principal at March 31, 2002 was $200,000 with an interest rate of 5.75% 4. Income Taxes At December 31, 2001, the Company had net operating loss carry forwards (NOL's) of approximately $4 million for federal income tax purposes, which expire through 2021. The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and liabilities at December 31, 2001 consisted of $1.4 million primarily from NOL's offset by a valuation allowance of $.9 million, resulting in a net deferred tax asset of $.5 million. Accordingly, no income tax provision was required on the Company's pre-tax income for the three months ended March 31, 2002. 5. Subsequent Event On June 7, 2002, 100% of the Company's outstanding capital stock was acquired by nStor Technologies, Inc. ("nStor") pursuant to a Stock Purchase Agreement between Pacific Technology Group, Inc., the Company's parent ("Parent"), Pacific, and nStor. The purchase price consisted of 22,500,000 shares of nStor's common stock and 1,000 shares of nStor's convertible preferred stock, which is convertible into an additional 4,527,027 shares of nStor common stock, subject to approval by nStor's shareholders. nStor may also issue contingent consideration to Parent of up to 8,687,258 additional shares of nStor common stock based upon future operating results of the Company. 21 UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS The following unaudited pro forma condensed combined financial statements reflect the Company's acquisition (the "Acquisition") on June 7, 2002 of 100% of the outstanding capital stock of Stonehouse Technologies, Inc. ("Stonehouse") from Pacific Technology Group, Inc. ("Seller"). The purchase price consisted of 22,500,000 shares of the Company's common stock and 1,000 shares of Series L convertible preferred stock. The preferred stock is convertible into an additional 4,527,027 shares of the Company's common stock subject to shareholder approval. The Company may also issue contingent consideration to Seller of up to 8,687,258 additional shares of the Company's common stock based upon future operating results of Stonehouse. The statements are derived from and should be read in conjunction with the historical financial statements and notes thereto of the Company, as presented in the Company's Form 10-Q for the quarter ended March 31, 2002 and Annual Report on Form 10-K/A for the year ended December 31, 2001. They should also be read in conjunction with Stonehouse's historical financial statements, included elsewhere herein. The Acquisition will be accounted for under the purchase method of accounting in accordance with Statement of Financial Accounting Standards No. 141, Business Combinations, with assets acquired and liabilities assumed recorded at fair value, and Stonehouse's operating results included in the Company's consolidated financial statements, effective as of the date of Acquisition. The unaudited pro forma condensed combined statements of operations for the year ended December 31, 2001 and for the three months ended March 31, 2002 give effect to the Acquisition as if it had occurred as of January 1, 2001. The unaudited pro forma condensed combined balance sheet as of March 31, 2002 assumes the Acquisition was consummated on March 31, 2002. The pro forma adjustments are based on management's preliminary estimates of the value of tangible and intangible assets acquired, including a valuation of goodwill and certain other intangible assets performed by an independent valuation firm. However, those estimates could change as additional information becomes available or as additional events occur. The unaudited pro forma financial information is not designed to represent and does not represent what the combined results of operations or financial position would have been had the Acquisition been completed as of the dates assumed, and is not intended to project the combined results of operations for any future period or the combined financial position as of any future date. As shown in the historical Statement of Operations, during 2001 Stonehouse incurred a net loss of $2,830,000, which represents a significant decline in operating results from prior years. During 2000, Stonehouse incurred a net loss of $228,000 and during 1999, Stonehouse realized net income of $114,000. These amounts are net of depreciation and amortization of $320,000 and $592,000, respectively. The 2001 loss reflects the implementation of a revised business plan beginning in February 2001, by a newly-employed business team, which contemplated substantial increases to marketing, sales and administrative programs, in order to significantly expand future revenues. Stonehouse subsequently determined that the new plan was not in its best interests and, as a result, during the fourth quarter of 2001, this plan was discontinued. Stonehouse's previous top executive reassumed the chief executive officer duties and the new business team and certain other employees were terminated in the fourth quarter of 2001 or early 2002. Stonehouse estimates that operating expenses in excess of $3 million related to the discontinued business plan were incurred in 2001. The unaudited pro forma condensed combined statement of operations for the year ended December 31, 2001 excludes the pro forma effect of the operating expense reductions implemented during the fourth quarter of 2001 and in early 2002 as a result of the discontinuation of the business plan, as well as certain additional expense reductions that are expected to result from the Acquisition. 22 UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET MARCH 31, 2002 (unaudited) (in thousands)
Historical Pro Forma ----------------------------- ----------------------- nStor Stonehouse Technologies Technologies Adjustments Combined ----------------------------- ----------------------- ASSETS ------ Current assets: Cash $ 1,028 $ 425 $ - $ 1,453 Accounts receivable, net 1,198 1,050 - 2,248 Receivable from affiliate - 331 - 331 Inventories 865 - - 865 Prepaid expenses and other 120 125 - 245 ------- ------- ------- ------- Total current assets 3,211 1,931 - 5,142 Property and equipment, net 1,183 156 - 1,339 Deferred tax asset - 524 (524)(a) - Goodwill and other intangible assets, net 1,989 4,880 (4,880)(b) 11,533 9,544 (c) ------- ------- ------- ------- $ 6,383 $ 7,491 $ 4,140 $18,014 ======= ======= ======= ======= LIABILITIES ----------- Current liabilities: Borrowings $ 2,079 $ 200 $ - $ 2,279 Accounts payable and other 4,210 1,003 486 (d) 5,699 Deferred revenue - 1,564 - 1,564 ------- ------- ------- ------- Total current liabilities 6,289 2,767 486 9,542 Long-term debt 3,600 - - 3,600 ------- ------- ------- ------- Total liabilities 9,889 2,767 486 13,142 ------- ------- ------- ------- Shareholders' (Deficit) Equity (3,506) 4,724 (4,724)(e) 4,872 8,378 (f) ------- ------- ------- ------- $ 6,383 $ 7,491 $ 4,140 $18,014 ======= ======= ======= =======
See accompanying notes to unaudited proforma condensed combined financial statements. 23
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 2001 (dollars in thousands, except per share data) Historical (audited) Pro Forma ----------------------------- ----------------------- nStor Stonehouse Technologies Technologies Adjustments Combined ----------------------------- ----------------------- Sales $17,886 $ 6,608 $ - $24,494 Cost of sales 15,837 3,699 (57)(g) 19,415 (64)(h) ------- ------- ------ ------- Gross margin 2,049 2,909 121 5,079 ------- ------- ------ ------- Operating expenses: Selling, general and administrative 10,354 4,604 (227)(g) 14,678 (53)(h) Research and development 3,579 940 - 4,519 Depreciation and amortization 1,622 201 284 (g) 2,529 422 (i) ------- ------ ------ ------- Total operating expenses 15,555 5,745 426 21,726 ------- ------- ------ ------- Loss from operations (13,506) (2,836) (305) (16,647) Realized and unrealized losses on marketable securities, net (811) - - (811) Interest expense (912) - - (912) Other income, net 402 6 - 408 ------- ------- ------ ------- Loss before preferred stock dividends, extraordinary items and induced conversion (14,827) (2,830) (305) (17,962) Extraordinary gains from debt extinguishment 869 - - 869 ------- ------- ------ ------- Net loss (13,958) (2,830) (305) (17,093) Preferred stock dividends (1,560) - - (1,560) Induced conversion of convertible preferred stock (3,000) - - (3,000) ------- ------- ------ ------- Net loss available to common stock ($18,518) ($ 2,830) ($ 305) ($21,653) ======= ======= ====== ======= Basic and diluted net loss per common share: Loss before extraordinary items ($ .43) ($ .33) Extraordinary gains .02 .01 ------- ------- Net loss per common share ($ .41) ($ .32) ======= ======= Weighted average number of common shares considered outstanding, basic and diluted 44,832,503 22,500,000(f) 67,332,503 ========== ========== ==========
See accompanying notes to unaudited proforma condensed combined financial statements. 24
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS THREE MONTHS ENDED MARCH 31, 2002 (unaudited) (dollars in thousands, except per share data) Historical Pro Forma ----------------------------- ----------------------- nStor Stonehouse Technologies Technologies Adjustments Combined ----------------------------- ----------------------- Sales $ 1,559 $ 1,915 $ - $ 3,474 Cost of sales 1,675 911 (13)(g) 2,558 (15)(h) ------- ------- ------ ------- Gross (loss) margin (116) 1,004 28 916 ------- ------- ------ ------- Operating expenses: Selling, general and administrative 1,530 611 (8)(g) 2,124 (9)(h) Research and development 737 196 - 933 Depreciation and amortization 243 - 21 (g) 369 105 (i) -------- ------- ------ ------- Total operating expenses 2,510 807 109 3,426 ------- ------- ------ ------- (Loss) income from operations (2,626) 197 (81) (2,510) Realized losses on marketable securities (1,329) - (1,329) Fair value of option granted to customer (670) - - (670) Interest expense (137) (3) - (140) Other expense, net (40) - - (40) ------- ------- ------ ------- Net (loss) income available to common stock ($ 4,802) $ 194 ($ 81) ($ 4,689) ======= ======= ====== ======= Basic and diluted net loss per common share ($ .04) ($ .03) ======= ======= Weighted average number of common shares considered outstanding, basic and diluted 114,940,708 22,500,000(f) 137,440,708 ============ ========== ===========
See accompanying notes to unaudited proforma condensed combined financial statements. 25 NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS NOTE 1. PURCHASE PRICE The Company acquired 100% of the outstanding common stock of Stonehouse by issuing (i) 22,500,000 shares of common stock, and (ii) 1,000 shares of Series L Convertible Preferred Stock which is convertible into an additional 4,527,027 shares of common stock subject to shareholder approval. The purchase price was calculated assuming a market value of $.31 per share, the average of the Company's closing market prices for the four days before and after the terms of the Acquisition were agreed to (April 30, 2002). The total purchase price is as follows (in thousands): Fair value of shares issued (including 4,527,027 shares of common stock issuable upon conversion of the Series L Convertible Preferred Stock) based on a market price of $.31 per share $ 8,378 Estimated transaction costs: Brokerage fees 336 Legal, accounting and other 150 486 ----- ------- Total purchase price $ 8,864 ======= NOTE 2. ALLOCATION OF PURCHASE PRICE (in thousands) Cash $ 425 Accounts receivable, net 1,050 Receivable from affiliate 331 Prepaid expenses and other 125 Property and equipment, net 156 Goodwill $6,370 ------ Other intangible assets: Customer relationships 2,259 Software 660 Non-compete agreement 255 ------ Total 3,174 ------ Total goodwill and other intangible assets 9,544 Current borrowings (200) Accounts payable, accrued expenses and other liabilities (1,003) Deferred revenue (1,564) ------ Total purchase price $ 8,864 ====== 26 NOTE 3. PRO FORMA ADJUSTMENTS The following are descriptions of the pro forma purchase accounting entries and other Acquisition related adjustments, identified as (a) through (i), which have been reflected in the accompanying Unaudited Pro Forma Condensed Combined Balance Sheet and Unaudited Pro Forma Condensed Combined Statements of Operations (in thousands): a) elimination of Stonehouse's historical deferred tax asset b) elimination of Stonehouse's historical goodwill c) recording goodwill and other intangible assets as part of the purchase price allocation detailed in Note 2 d) accrual of estimated transaction costs detailed in Note 2 e) elimination of historical shareholder's equity of Stonehouse f) recording issuance of common and preferred stock based on an estimated market value of $.31 per share g reclassification of depreciation expense included in cost of sales and selling, general and administrative expenses to depreciation and amortization h) reduction in historical rent expense pursuant to a new lease for the Stonehouse office facilities i) amortization of fair value of intangible assets acquired based on the following estimated useful lives: Customer relationships ten (10) years Software five (5) years Non-compete agreements four (4) years -----END PRIVACY-ENHANCED MESSAGE-----