SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
__X___ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________________________
Commission File Number: 0-8354
nSTOR TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its Charter)
Delaware 95-2094565
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 Century Blvd.
West Palm Beach, FL 33417
(Address of principal executive office)
(561) 640-3103
(Registrant's telephone number)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the Registrant was required to file
such reports) and (2) has been subject to such filing requirements
for the past 90 days. Yes X No _____
Number of shares outstanding of the Registrant's Common Stock,
par value $.05 per share, as of September 30, 1997: 18,670,477
<PAGE>
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
The condensed financial statements included herein have
been prepared by the registrant, without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to
such rules and regulations; however, the registrant believes that
the disclosures are adequate to make the information presented not
misleading. It is suggested that these condensed financial
statements be read in conjunction with the financial statements and
the notes thereto included in the registrant's annual report on
Form 10-K for the fiscal year ended October 31, 1996 and its
transition report on Form 10-Q for the two months ended December
31, 1996.
The condensed financial statements for the interim
periods included herein, which are unaudited, include, in the
opinion of management, all adjustments (consisting only of normal
recurring adjustments) necessary to present fairly the financial
position and results of operations of the registrant for the
periods presented. The results of operations for interim periods
should not be considered indicative of results to be expected for
the full year. Certain 1996 amounts have been reclassified to
conform to the 1997 presentation.
<PAGE> 2
nSTOR TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands) (Note 2)
Sept. 30, Dec. 31,
ASSETS (Note 5) 1997 1996
---------------- --------- ---------
Current assets:
Cash and cash equivalents:
Unrestricted $ 116 $ 4,619
Restricted 1,004 -
Accounts receivable, net of $47
and $257 allowance 4,808 5,016
Inventories (Note 3) 7,055 4,117
Prepaid expenses and other 196 129
Deferred tax asset (Note 6) 238 182
------- -------
Total current assets 13,417 14,063
Property and equipment, net of $341
and $90 accumulated depreciation 1,757 1,003
Goodwill and other intangible assets,
net of $312 and $60 accumulated
amortization (Note 2) 4,947 5,282
------- -------
$20,121 $20,348
======= =======
LIABILITIES
-----------
Current liabilities:
Borrowings (Note 5) $ 3,752 $ -
Accounts payable 4,159 4,380
Accrued expenses and other 1,260 2,635
------- -------
Total current liabilities 9,171 7,015
Convertible notes due 2000 (including
$204 and $197 of accrued interest) 545 516
------- -------
Total liabilities 9,716 7,531
------- -------
Commitments and contingencies
STOCKHOLDERS' EQUITY
--------------------
Preferred stock, $.01 par; shares
authorized 1,000,000; outstanding none - -
Common stock, $.05 par; shares authorized
24,000,000; outstanding 18,670,477 934 934
Additional paid-in capital 30,393 30,393
Deficit (20,922) (18,510)
------- -------
Total stockholders' equity 10,405 12,817
------- -------
$20,121 $20,348
======= =======
_______
See accompanying notes to consolidated financial statements.
<PAGE> 3
nSTOR TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share data) (Note 2)
Three Months Nine Months
Ended Sept. 30, Ended Sept. 30,
-------------------- --------------------
1997 1996 1997 1996
--------- --------- --------- ---------
Sales $ 5,950 $ 3,094 $20,527 $ 4,413
Cost of sales 4,278 1,835 14,127 2,851
------- ------- ------- -------
Gross profit 1,672 1,259 6,400 1,562
------- ------- ------- -------
Operating expenses:
Research and development 672 435 2,096 564
Selling, general and
administrative 2,187 755 6,708 923
------- ------- ------- -------
Total operating expenses 2,859 1,190 8,804 1,487
------- ------- ------- -------
Income (loss) from operations (1,187) 69 (2,404) 75
Gain from sale of IMNET Systems,
Inc. stock (Note 4) - 807 - 11,955
Interest income, net of
investment expenses 33 117 103 187
Interest expense (66) (18) (111) (54)
------- ------- ------- -------
Net income (loss) ($ 1,220) $ 975 ($ 2,412) $12,163
======= ======= ======= =======
Earnings (loss) per common share ($ .07) $ .06 ($ .13) $ .69
======= ======= ======= =======
Average number of common shares
used in computing earnings
(loss) per common share 18,670,477 17,603,882 18,670,477 17,601,613
========== ========== ========== ==========
_______
See accompanying notes to consolidated financial statements.
<PAGE> 4
nSTOR TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(dollars in thousands)
Addi-
Common Stock tional
----------------- Paid-In
Shares Amount Capital Deficit Total
---------- ------ ------- ------- -------
Balances, December
31, 1996 18,670,477 $934 $30,393 ($18,510) $12,817
Net loss for the
nine months
ended September
30, 1997 - - - (2,412) (2,412)
---------- ---- ------- ------- -------
Balances, September
30, 1997 18,670,477 $934 $30,393 ($20,922) $10,405
========== ==== ======= ======= =======
_______
See accompanying notes to consolidated financial statements.
<PAGE> 5
nSTOR TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) (Note 2)
Nine Months
Ended Sept. 30,
-------------------
1997 1996
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ($ 2,412) $ 12,163
Adjustments to reconcile net income (loss)
to net cash used by operating activities:
Gain from sale of IMNET Systems, Inc. stock - (11,955)
Depreciation and amortization 503 28
Changes in assets and liabilities net
of effects from acquisition:
Decrease (increase) in accounts receivable 208 (1,411)
Increase in inventories (2,938) (410)
Increase in prepaid expenses and other (123) (53)
(Decrease) increase in accounts payable,
accrued expenses and other liabilities (1,400) 1,328
-------- --------
Net cash used by operating activities (6,162) (310)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net proceeds from sale of IMNET Systems, Inc. stock - 11,955
Payment for acquisition - (592)
Additions to property and equipment (1,090) (219)
-------- --------
Net cash (used) provided by investing activities (1,090) 11,144
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings 11,283 -
Repayment of borrowings (7,530) -
Increase in restricted cash and cash equivalents (1,004) -
Proceeds from exercise of stock warrants - 60
-------- --------
Net cash provided by financing activities 2,749 60
-------- --------
Net (decrease) increase in unrestricted cash and
cash equivalents during the period (4,503) 10,894
Unrestricted cash and cash equivalents at the
beginning of the period 4,619 7
-------- --------
Unrestricted cash and cash equivalents at the
end of the period $ 116 $ 10,901
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during period for:
Interest $ 64 $ -
======== ========
Income taxes $ 239 $ -
======== ========
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
ACTIVITIES:
Acquisition (Note 2):
Inventories $ - $ (895)
Property and equipment - (152)
Intellectual property - (233)
Accrued expenses - 588
Minority interest - 100
-------- --------
Cash paid $ - ($ 592)
======== ========
________
See accompanying notes to consolidated financial statements.
<PAGE> 6
nSTOR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
As a result of two acquisitions completed during the year ended
December 31, 1996 (see Note 2 to Consolidated Financial
Statements), nStor Technologies, Inc. (the "Company") is currently
engaged in the development, manufacture and marketing of a full
range of multi-platform storage solutions including advanced
external RAID (Redundant Array of Independent Disks) subsystems,
tape backup solutions, UNIX-based memory products, storage
management hardware and software, digital media management
products, and enterprise resource planning manufacturing software.
Prior to the first acquisition in June 1996, the Company's only
assets were securities issued by IMNET Systems, Inc. ("IMNET")
which the Company had acquired in October 1992 in exchange for
substantially all of the Company's operating assets. During the
period in which the Company owned the IMNET securities, the
Company's only activities consisted of monitoring its investment in
IMNET and evaluating potential business opportunities. During
fiscal 1996, the Company sold 100% of the IMNET securities (see
Note 4 to Consolidated Financial Statements).
Fiscal Year
In November 1996, the Company changed its fiscal year from October
31 to December 31, effective with the calendar year beginning
January 1, 1997. Certain amounts in the financial statements
presented for the previous fiscal 1996 periods have been restated
to conform to the new fiscal 1996 presentation.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
<PAGE> 7
(2) ACQUISITIONS
Effective June 3, 1996, nStor Corporation, Inc. ("nStor"), a newly-formed
subsidiary of the Company, which was 80% owned at the time,
acquired certain net assets from Seagate Peripherals, Inc.
("Seagate") located in Lake Mary, Florida. The purchase price
consisted of $592,000 in cash, including acquisition costs, and a
royalty to Seagate payable based upon 5% of nStor's sales of
certain products during the 15 month period ending December 31,
1997. Effective October 31, 1996, the Company acquired the
remaining 20% of nStor from R. Daniel Smith, president of nStor and
currently a director and officer of the Company, in exchange for
one million shares of the Company's common stock, valued at
$600,000 (net of applicable discount).
Effective December 1, 1996, nStor acquired substantially all the
net assets of Parity Systems, Inc. ("Parity") located in Los Gatos,
California. The purchase price consisted of $2.8 million in cash
and a warrant (exercisable at any time through December 1999) to
purchase 500,000 shares of the Company's common stock at $2.10 per
share, valued at $470,000. The transaction closed on December 30,
1996, on which date the Company repaid the approximately $3 million
outstanding balance of Parity's bank line of credit.
The acquisitions have been accounted for under the purchase method
of accounting, with assets acquired and liabilities assumed
recorded at estimated fair values as of the effective acquisition
dates, and the operating results of the acquired businesses
included in the Company's consolidated financial statements from
those dates.
The excess of the purchase price of both acquisitions over the fair
value of net assets acquired (goodwill) was $4.9 million, as
adjusted, and is being amortized on a straight-line basis. nStor
also recorded $.4 million, as adjusted, as intellectual assets
related to the nStor acquisition, consisting of trademarks and
proprietary technology, which are being amortized on a straight-line basis
over 15 years. For the three and nine months ended
September 30, 1997, amortization of intangible assets approximated
$55,000 and $256,000, respectively.
<PAGE> 8
(3) INVENTORIES
Inventories are summarized as follows (in thousands):
Sept.30, Dec. 31,
1997 1996
-------- --------
Raw materials $ 5,509 $ 3,577
Work-in-process 1,043 88
Finished goods 503 452
------- -------
$ 7,055 $ 4,117
======= =======
Substantially all inventory is pledged as collateral for indebted-ness (Note 5).
(4) GAIN ON SALE OF IMNET
During the nine months ended September 30, 1996, the Company sold
all of its shares of IMNET (see Note 1 to Consolidated Financial
Statements) and recognized gains of $.8 million and $12 million
during the three and nine months ended September 30, 1996,
respectively, representing the net cash proceeds received.
(5) BORROWINGS
Borrowings consist of an asset based revolving bank credit facility
(the "Revolver"), under which nStor may borrow up to $7 million,
and a promissory note issued by a director of the Company, H. Irwin
Levy ("Director Loan"), under which the Company may borrow up to $1
million.
Advances under the Revolver are limited to 75% of eligible accounts
receivable, as defined. The Revolver bears interest, payable
monthly, which is indexed to LIBOR (London Interbank Offered Rate)
plus a percentage (which may be adjusted quarterly depending on a
specific operating ratio) ranging from 2-3/8% to 3% (8.7% at
September 30, 1997), is guaranteed by the Company and matures on
May 29, 1998. The Company pays a commitment fee on the unused
portion of the Revolver at one-eighth of one percent (1/8 of 1%)
per annum. Advances under the Revolver are collateralized by
substantially all assets of the Company. The loan agreement
provides certain restrictions on the payment of dividends, the
<PAGE> 9
incurrence of additional indebtedness and capital expenditures, and
requires minimum working capital, tangible net worth and other
financial covenants. The outstanding principal balance under the
Revolver at September 30, 1997 was $2,852,000, and there was no
additional availability on that date.
The Director Loan bears interest, payable monthly, at prime plus
one and one-half percent (1.5%) per annum (10% at September 30,
1997), matures in March 1998, is subordinated to the Revolver and
is collateralized by substantially all assets of the Company. In
connection with the Director Loan, on October 1, 1997 the Company
issued a warrant to Mr. Levy to purchase 50,000 shares of common
stock of the Company at a purchase price of $2.35 per share,
exercisable on the date of grant, expiring on September 16, 2000.
In addition, from December 15, 1997 through March 15, 1998, the
Company is obligated to issue to Mr. Levy warrants to purchase up
to 5,000 shares, for every thirty day period the outstanding
principal balance is not repaid in full, at $2.35 per share. The
outstanding balance under the Director Loan at September 30, 1997
was $900,000.
(6) INCOME TAXES
As of December 31, 1996, the Company's tax year end, there were
unused net operating loss carryforwards ("NOL's") for regular
federal income tax purposes of $1.3 million, principally expiring
in 2006, and research and development tax credit carryforwards of
$530,000, expiring from 2002 through 2006. No financial statement
benefit has been recognized on these carryforwards. During the
nine months ended September 30, 1996, no income tax expense was
recorded on income before income taxes due to utilization of the
NOL's. In conjunction with the Alternative Minimum Tax ("AMT")
rules, the Company also has available AMT credit carryforwards of
approximately $238,000, at December 31, 1996, which may be used
indefinitely to reduce regular federal income taxes.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
The Company completed two acquisitions during the year ended
December 31, 1996 - the nStor acquisition, effective June 3, 1996,
and the Parity acquisition, effective December 1, 1996 (see Note 2
to Consolidated Financial Statements). Allocations have been made
to reflect the estimated fair values, as of the effective
<PAGE> 10
acquisition dates, of the net assets acquired which has resulted in
asset bases which differ from those of the previous owners.
Accordingly, comparative financial data of the acquired entities
for periods prior to the effective dates of the acquisitions are
not presented since they would be neither comparable nor
informative. In addition, certain components of net income in 1997
are not comparable to those of 1996 because operating results for
the nine months ended September 30, 1996 include only four months
of nStor's operations and do not include operations associated with
Parity.
Results of Operations
For the three and nine months ended September 30, 1997, the Company
incurred net losses of $1.2 million and $2.4 million, respectively.
These losses reflect sales revenues which were below expectations
(see "Sales" below) as well as increased costs associated with
gearing up the Company's infrastructure to support anticipated
future growth (see "Operating Expenses" below). The Company
reported net income of $1 million and $12.2 million, respectively,
for the corresponding three and nine month periods in 1996. The
1996 results included gains of approximately $.8 million and $12
million, respectively, from the sale of the Company's investment in
IMNET (see Note 4 to Consolidated Financial Statements).
From the date the Company disposed of substantially all of its
operating assets in October 1992 in exchange for shares in IMNET
until the nStor acquisition in June 1996, the Company's only
activities consisted of monitoring its investment in IMNET and
evaluating potential business opportunities. Accordingly,
operating results for 1996 consisted of the aforementioned gain on
the sale of IMNET and only four months of nStor operations.
Sales
Net sales for the three and nine months ended September 30, 1997
were $6 million and $20.5 million, respectively. Sales levels
have been adversely affected during 1997 by delays in completing
the development of the Company's new CR8e RAID subsystem, a softer
market for the Company's products resulting in reduced sales volume
and sales prices for the Company's storage subsystems, and by
manufacturing disruptions associated with the transfer of Parity's
production from California to Florida. Net sales for the three and
nine month periods ended September 30, 1996 (which excluded
operations associated with Parity) amounted to $3.1 million and
$4.4 million, respectively, with the latter period including only
four months of sales following the nStor acquisition, effective
June 3, 1996. Future sales are expected to be positively affected
by the introduction and availability of certain new products and
expansion into the European market place. Increased sales activity
<PAGE> 11
is also anticipated from recent agreements with Silicon Graphics,
Inc. ("SGI"), which has positioned the Company as the only third-party
memory manufacturer, to date, to be granted all three memory
licenses issued by SGI to manufacture its proprietary memory
products; completion of agreements with several new OEM's
(original equipment manufacturers) and a software supplier; and
expansion of the Company's enterprise resource planning
manufacturing software services.
The foregoing statements regarding increases in nStor's future
sales are forward looking statements that may prove not to be
accurate. Factors that could cause such statements not to be
accurate include, but are not limited to, increased competition for
the Company's products, unexpected delays in production,
improvements in alternative technologies, a lack of market
acceptance for new products introduced by the Company and the
Company's failure to successfully market its products.
Cost of Sales/Gross Margin
The Company's gross margins are dependent, in part, on product mix
which is anticipated to fluctuate from time to time. Gross margins
for the three and nine months ended September 30, 1997 were 28% and
31%, respectively, as compared to 41% and 35% for the three and
nine months ended September 30, 1996. The reduced gross margins
for the 1997 periods were primarily the result of lower sales
volume and sales prices for the Company's storage subsystems and
overall lower margins from the sale of the Company's memory
products. The Company expects gross margins to improve in the near
future over the reported 1997 levels due to an expected increase in
sales revenues and certain product cost efficiencies.
The foregoing statements regarding future gross margins are forward
looking statements that may prove not to be accurate. Factors that
could cause such statements not to be accurate include, but are not
limited to, increases in the cost of components or raw materials
used in the Company's products, increased labor costs, higher
production costs for new products developed by the Company,
decreases in the price of and demand for the Company's products,
and a shift in product sales to less profitable products.
Operating Expenses
The Company's operating expenses for the three and nine months
ended September 30, 1997 amounted to $2.9 million and $8.8 million,
respectively, consisting of $.7 million and $2.1 million,
respectively, in research, development and other engineering costs,
and $2.2 million and $6.7 million, respectively, in selling,
general and administrative expenses. Operating expenses for the
three and nine months ended September 30, 1996 (which excluded
<PAGE> 12
operations associated with Parity) were $1.2 million and $1.5
million, respectively, with the nine month period including only
four months of operations following the nStor acquisition.
Operating expenses for the quarter ended September 30, 1997 were
significantly greater than those reported for the comparable 1996
quarter, primarily due to the growth of the Company over the past
year, including additional operating costs brought about by the
Parity acquisition effective December 1, 1996 and additional
expenses associated with preparation for the Company's anticipated
future growth. During 1997, significant costs were invested in
redesigning, standardizing and obtaining agency certification for
the Parity product line.
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 ultimately
result in generating revenues. The Company does not anticipate
significant increases in research and development during the
remainder of the fiscal year.
Selling and marketing costs primarily consist of salaries,
commissions and related benefits, expenses in connection with
tradeshows, conferences and seminars, facilities expenses and other
miscellaneous costs allocated to those personnel. General and
administrative costs primarily consist of general corporate
expenses, executive officers, finance and accounting salaries and
related benefits, professional fees such as legal and accounting,
facilities costs allocated to those personnel, and amortization and
depreciation of certain property, equipment and intangibles,
including goodwill. The most significant increase in selling,
general and administrative expenses for the quarter ended September
1997 when compared to the 1996 quarter was attributable to higher
salaries, wages, commissions and related fringe benefits. The
Company does not expect selling, general and administrative
expenses to significantly increase in the near future, except to
the extent that sales commissions and other marketing costs may
increase due to expected increases in sales revenue.
Income Taxes
Income tax expense was not provided on the Company's income before
income taxes during the three and nine months ended September 30,
1996 due to utilization of the NOL's (see Note 6 to Consolidated
Financial Statements).
<PAGE> 13
Liquidity and Capital Resources
Net cash used by operating activities amounted to $6.2 million and
$.3 million during the nine months ended September 30, 1997 and
1996, respectively. The 1997 amount is principally attributable to
a $2.9 million increase in inventories, a $1.9 million net loss
(excluding depreciation and amortization) and a $1.4 million
reduction of accounts payable, accrued expenses and other
liabilities. During 1996, net cash used by operating activities
resulted from an increase in accounts receivable of $1.4 million,
offset by an increase in accounts payable, accrued expenses and
other liabilities of $1.3 million.
Net cash used by investing activities approximated $1.1 million
during the nine months ended September 30, 1997 due to additions to
property and equipment. During the corresponding period in 1996,
investing activities provided $11.1 million of net cash, including
$12 million from the sale of the Company's investment in IMNET (see
Note 4 to Consolidated Financial Statements).
Net cash provided by financing activities for the nine months ended
September 1997 approximated $2.7 million, consisting of net
borrowings of $3.8 million less $1 million of previously
unrestricted cash required as collateral under the Revolver (see
Note 5 to Consolidated Financial Statements). Until May 1997,
nStor's working capital needs, including the approximately $5.8
million in cash required for the Parity acquisition, were funded by
cash flow from operations and the Company's cash balances. In May
1997, the Company entered into the Revolver to finance its
expanding working capital needs. Under the Revolver, the Company
may borrow up to $7 million through May 29, 1998 based on 75% of
eligible accounts receivable, as defined. As of September 30,
1997, the outstanding balance under the Revolver was approximately
$2.9 million and there was no additional availability on that date.
During September 1997, the Company borrowed $900,000 under the
Director Loan pursuant to a promissory note under which the Company
may borrow up to a maximum of $1 million through March 1998 (see
Note 5 to Consolidated Financial Statements).
Management believes that cash flow generated from operations,
amounts available under the Revolver and the Director Loan and
other potential financing sources will be sufficient to satisfy its
working capital and capital expenditure needs for the next twelve
months as currently planned. However, there can be no assurance
that additional capital will not be needed during that period.
<PAGE> 14
Effect of Inflation
Inflation has not had an impact on the Company's operations and is
not expected to have any material impact in 1997.
Forward Looking Information: Certain Cautionary Statements
Certain statements contained in "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and
elsewhere in this Form 10-Q, that are not related to historical
results, are forward looking statements. Actual results may differ
materially from those projected or implied in the forward looking
statements. Further, certain forward looking statements are based
upon assumptions of future events which may not prove to be
accurate. These forward looking statements involve risks and
uncertainties including but not limited to the Company's future
cash flows, sales, gross margins and operating expenses, the effect
of conditions in the technology industry and the economy in
general, legal proceedings, as well as certain other risks.
Subsequent written and oral forward looking statements attributable
to the Company or persons acting on its behalf are expressly
qualified in their entirety by cautionary statements in this
paragraph and elsewhere described in this Form 10-Q and in other
reports filed by the Company with the Securities and Exchange
Commission.
Part II - Other Information
Item 6 - Exhibits and Reports on Form 8-K:
(a) Exhibits:
(10)(i) Promissory Note from nStor Technologies, Inc. to H.
Irwin Levy dated September 16, 1997 for $1 million.
(10)(ii) Letter Agreement between H. Irwin Levy and nStor
Technologies, Inc. dated September 16, 1997
regarding (10)(i) Note.
(27) Financial Data Schedule
(b) Reports on Form 8-K:
The Company was not required to file Form 8-K during the
quarter for which this report is filed.
<PAGE> 15
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
nSTOR TECHNOLOGIES, INC.
(Registrant)
/s/ Jack Jaiven
November 13, 1997 _______________________________
Jack Jaiven, Vice President
and Principal Financial and
Accounting Officer
<PAGE> 16
EXHIBIT (10)(i)
PROMISSORY NOTE
U.S. $1,000,000.00 September 16, 1997
FOR VALUE RECEIVED, nSTOR TECHNOLOGIES, INC., a Delaware corporation
(hereinafter referred to as the "Maker"), promises to pay to the order of H.
IRWIN LEVY (hereinafter referred to as the "Payee"), the principal sum of ONE
MILLION AND NO/100 DOLLARS (U.S.$1,000,000.00), or so much thereof as shall
have been advanced and/or readvanced by the Payee to the Maker and shall then
be outstanding, together with interest thereon as hereinafter set forth.
I. Interest. During the period commencing on the date
hereof and ending on and including the Maturity Date of this Note, the
principal balance outstanding hereunder shall bear interest at a floating
rate equal to the "Wall Street Journal Prime Rate" (as said term is
hereinafter defined) plus one and one-half percent (1.5%) per annum.
Interest computed at such rate shall be payable monthly in arrears on the 1st
day of each month during the term of this Note, commencing on the 1st day of
October, 1997. As used herein, the term "Wall Street Journal Prime Rate"
shall mean and refer to the so-called prime rate of interest as published by
the Wall Street Journal from time to time. In the event that the Wall Street
Journal shall cease to be published or shall cease to publish the prime rate
of interest, then, in such event, the term "Wall Street Journal Prime Rate"
shall be deemed to mean and refer to the prime rate of interest as published
by any other publication selected by the holder of this Note in the exercise
of such holder's reasonable discretion.
II. Maturity Date. Unless sooner paid, the Maker agrees to
pay the entire outstanding principal balance of the indebtedness evidenced
by this Note together with all accrued but unpaid interest thereon on the 1st
day of March 1998 (the "Maturity Date").
III. Prepayment. DURING THE FIRST SIXTY (60) DAYS OF THE TERM
OF THIS NOTE, MAKER SHALL BE PROHIBITED FROM MAKING ANY PAYMENT(S) OR
PREPAYMENT(S) ON ACCOUNT OR IN RESPECT OF THE INDEBTEDNESS EVIDENCED BY THIS
NOTE IF, AS A RESULT OF OR FOLLOWING ANY SUCH PAYMENT OR PREPAYMENT, THE
OUTSTANDING PRINCIPAL BALANCE OF THE INDEBTEDNESS EVIDENCED BY THIS NOTE
SHALL BE REDUCED TO AN AMOUNT WHICH IS LESS THAN FIVE HUNDRED THOUSAND AND
NO/100 DOLLARS ($500,000.00). Thereafter, Maker shall have the right to
prepay the indebtedness evidenced by this Note in whole or in part at any
time without penalty or premium.
IV. [Intentionally Deleted].
V. Default, Etc. The occurrence of any one or more of the
following events, circumstances, or conditions shall constitute a default
hereunder: (i) failure of the Maker to pay to the Payee promptly, on the
date when the same shall become due (whether at scheduled maturity, upon
acceleration or otherwise) any portion of the principal sum outstanding
hereunder or any installment of interest thereon or any other sum which may
at any time be or become due and payable under this Note and the continuation
of such failure to pay for a period of ten (10) days; or (ii) the occurrence
of any other default under this Note or any other document, instrument,
agreement or security agreement executed by Maker to or with Payee in
conjunction herewith and the continuation of such default following the
giving of any notice and/or the expiration of any grace period which may be
required and/or provided for herein or therein; or (iii) the occurrence of
any default (other than a default on the part of First Union National Bank
of Florida) under that certain Revolving Credit and Security Agreement dated
<PAGE>
as of the 29th day of May, 1997 (the "First Union Loan Agreement"), by and
between nStor Corporation, Inc. and First Union National Bank of Florida; or
(iv) the occurrence of any default (other than a default on the part of First
Union National Bank of Florida) under any promissory note, mortgage and/or
other loan, financing and/or security document or agreement referred to in,
and/or executed contemporaneously and/or in conjunction with, the First Union
Loan Agreement; or (v) the occurrence of any event, act or omission on the
part of, or with respect to, Maker, nStor Corporation, Inc. or any of their
respective subsidiaries or affiliates, which would constitute a default or
event of default under the First Union Loan Agreement; or (vi) the filing or
institution by or against Maker or nStor Corporation, Inc. of any petition
or proceeding under any state or federal bankruptcy, insolvency or other
similar law, statute, etc.; or (vii) the occurrence of any material adverse
change in the condition, financial or otherwise, of Maker or nStor
Corporation, Inc. Upon or at any time after the occurrence of any such
default, the indebtedness evidenced by this Note and/or any note(s) or other
obligation(s) which may be taken in renewal, extension, substitution, or
modification of all or any part of the indebtedness evidenced hereby and all
other obligations of the Maker to the Payee, howsoever created and existing,
shall immediately become due and payable without demand upon or notice to the
Maker, and the Payee shall be entitled to exercise the other remedies set
forth in herein and/or as provided by law.
VI. Interest on Delinquent Payments. In the event that Maker
shall fail to pay any installment of interest hereunder within five (5)
business days following the date upon which such installment shall have first
become due and payable, then, in such event, in addition to any and all other
rights and remedies available to Payee hereunder, Payee shall be entitled to
receive from Maker, and Maker shall be obligated to pay to Payee, interest
on such unpaid installment computed from the original due date of such
installment at the rate set forth in Paragraph I above, provided, however,
that upon and following the occurrence of any default under this Note
(including any default resulting from the continuation of Maker's failure to
pay any installment of interest following the expiration of the ten [10] day
grace period referred to in Clause [i] of Paragraph V above), interest on
such unpaid installment of interest and on the outstanding principal balance
of the indebtedness evidenced by this Note shall be computed at the Default
Rate set forth in Paragraph XIII below.
VII. Setoff, Etc. Upon the occurrence and during the
continuance of any default hereunder, the Payee is authorized, without notice
to the Maker (the giving of notice being expressly waived by the Maker) to
set off and apply any indebtedness owing by the Payee to the Maker against
the indebtedness evidenced by this Note, although such indebtedness then be
contingent or unmatured. The Payee agrees to notify the Maker after any such
setoff and application; provided, however, the failure to give such notice
shall not affect the validity of such setoff and application. The rights of
the Payee under this Paragraph VII are in addition to other rights and
remedies which the Payee may have.
VIII. Transfer of Note, Etc. The Payee may transfer this Note
and deliver to the transferee(s) all or any of the property then held by the
Payee as security for the indebtedness evidenced by this Note and the
transferee(s) shall thereupon become vested with all the powers and rights
herein given to the Payee with respect thereto; and the Payee shall
thereafter be forever relieved and fully discharged from any liability or
responsibility in the matter, but the Payee shall retain all rights and
powers hereby given with respect to any property not so transferred.
IX. Waiver of Presentment, Etc. The Maker hereby waives
presentment for payment, demand, notice of dishonor and protest and agrees
that (a) any Collateral, lien and/or right of setoff securing any
indebtedness evidenced by this Note may, from time to time, in whole or in
part, be exchanged or released, and any person liable on or with respect to
<PAGE>
this Note may be released -- all without notice to or further reservations
of rights against the Maker, any endorser, surety or guarantor and all
without in any way affecting or releasing the liability of the Maker, any
endorser, surety or guarantor, and (b) none of the terms or provisions hereof
may be waived, altered, modified or amended except as the Payee may consent
thereto in writing.
X. Expenses, Etc. The Maker hereby agrees to pay all
out-of-pocket costs and expenses, including reasonable attorneys' fees,
incurred by the Payee in the collection of the indebtedness evidenced by this
Note or in enforcing any of the rights, powers, remedies, and privileges of
the Payee hereunder whether or not suit be brought.
XI. Place of Payment, Etc. Both principal and interest of
this Note shall be payable in lawful currency of the United States of America
to the Payee at 100 Century Boulevard, West Palm Beach, Florida 33417, or
such other address designated by Holder from time to time, in immediately
available funds without deduction for or on account of any present or future
taxes, duties or other charges levied or imposed on this Note, the proceeds
hereof, or on the Maker or holder hereof by any government, or any
instrumentality, authority or political subdivision thereof. The Maker
agrees, upon the request of the Payee, to pay all such taxes (other than
taxes on or measured by net income of the holder thereof), duties, and other
charges in addition to the principal and interest evidenced by this Note.
XII. Maximum Interest Rate, Etc. Nothing contained in this
Note or any other instrument between the parties hereto shall be deemed to
establish or require the payment of a rate of interest in excess of the
lesser of (a) twenty-four and one-half percent (24.5%) per annum or (b) the
maximum lending rate now or at any time hereafter permitted to be charged on
similar loans or extensions of credit made by any lender or creditor in the
State of Florida ("Maximum Rate"). In the event that the rate of interest
so contracted to be paid should exceed the Maximum Rate, whether as a result
of its terms, or as a result of a court of competent jurisdiction
interpreting this Note so as to include Conditional Interest as interest for
the purposes of usury, or as a result of fluctuation, acceleration of the
maturity hereof or otherwise, the rate of interest to be paid hereunder shall
be automatically reduced to the Maximum Rate and so much of any interest
reserved, charged or taken as would cause the same to exceed the Maximum Rate
shall be deemed not to be a credit against interest but rather a payment on
account of and be automatically credited against outstanding principal
evidenced hereby regardless of how the same may appear on the Payee's or the
Maker's books or records or any memoranda of whatever nature evidencing the
same; provided, however, no such application shall operate to cure or as a
waiver of any event of default occasioning acceleration.
XIII. Default Rate, Etc. Following the occurrence and during
the continuance of any default hereunder, accrued interest and outstanding
principal shall bear interest at an annual rate equal to the lesser of: (a)
the greater of (i) the "Wall Street Journal Prime Rate" plus five percent
(5%) per annum, or (ii) fifteen percent (15%) per annum, or (b) the maximum
lending rate then permitted under Florida law.
XIV. Governing Law, Etc. This Note was executed and delivered
by Maker to Payee in the state of Florida. The Maker agrees that this Note
shall be deemed to have been made under and shall be governed by the laws of
the State of Florida in all respects, including matters of construction,
validity, and performance. If any provision of this Note shall be deemed
unenforceable under applicable law, such provision shall be ineffective, but
only to the extent of such unenforceability, without invalidating the
remainder of such provision or the remaining provisions of this Note. All
of the terms and provisions of this Note shall be applicable to and be
binding upon each and every maker, endorser, surety, guarantor, all other
persons who are or may become liable for the payment of the indebtedness
<PAGE>
evidenced hereby and their heirs, personal representatives, successors or
assigns (provided, however, this reference to "assigns" shall not be deemed
or construed to authorize or permit any assignment by the Maker).
nSTOR TECHNOLOGIES, INC., a
Delaware corporation
By: Mark F. Levy, President
(CORPORATE SEAL)
<PAGE>
EXHIBIT (10)(ii)
H. IRWIN LEVY
100 CENTURY BOULEVARD
WEST PALM BEACH, FLORIDA 33417
September 16, 1997
nStor Technologies, Inc.
100 Century Boulevard
West Palm Beach, Florida 33417
Re: $1,000,000.00 Revolving Credit Facility
Gentlemen:
This letter is intended to confirm and memorialize our
understanding and agreement in connection with the referenced
matter.
1. Upon and subject to the terms and conditions set forth in this
letter, H. Irwin Levy ("Lender"), has agreed to lend to nStor
Technologies, Inc.("Borrower"), and Borrower has agreed to borrow
from Lender, up to the principal sum of U.S. $1,000,000.00 (the
"Loan"). The proceeds of the Loan shall be advanced by Lender to
Borrower on a revolving credit basis, with the understanding that
the maximum principal amount which may, at any time, be outstanding
in respect of the Loan shall in no event exceed the principal sum
of $1,000,000.00. Within those limits, and subject to the other
term and conditions set forth in this letter, Borrower may borrow,
repay and re-borrow Loan proceeds from Lender in increments of
$50,000.00 or multiples thereof.
ANYTHING IN THE FOREGOING TO THE CONTRARY NOTWITHSTANDING, IT
UNDERSTOOD AND AGREED:
(A) THAT BORROWER SHALL BE REQUIRED, INITIALLY (i.e., WITHIN
THREE [3] DAYS FOLLOWING THE DATE OF THE EXECUTION AND DELIVERY OF
THE PROMISSORY NOTE REFERRED TO BELOW), TO BORROW A MINIMUM OF
$500,000.00 UNDER SUCH PROMISSORY NOTE; AND
(B) THAT DURING THE FIRST SIXTY (60) DAYS OF THE TERM OF SUCH
PROMISSORY NOTE, BORROWER SHALL BE PROHIBITED FROM MAKING ANY
PAYMENT(S) OR PREPAYMENT(S) ON ACCOUNT OR IN RESPECT OF THE
INDEBTEDNESS EVIDENCED THEREBY IF, AS A RESULT OF OR FOLLOWING ANY
SUCH PAYMENT OR PREPAYMENT, THE OUTSTANDING PRINCIPAL BALANCE OF
THE INDEBTEDNESS EVIDENCED BY SUCH PROMISSORY NOTE SHALL BE REDUCED
TO AN AMOUNT WHICH IS LESS THAN FIVE HUNDRED THOUSAND AND NO/100
DOLLARS ($500,000.00).
2. The Loan shall be evidenced by a promissory note (the "Note")
bearing even date with this letter in the principal amount of
$1,000,000.00, which Note shall be made, executed and delivered by
<PAGE>
Borrower to Lender simultaneously with the execution of this
letter. As more particularly set forth in the Note, the
outstanding principal balance of the Loan shall bear interest at a
floating rate equal to the "Wall Street Journal Prime Rate" (as
said term is defined in the Note) plus one and one-half percent
(1.5%) per annum. Interest computed at that rate shall be payable
monthly in arrears on the 1st day of each month during the term of
the Loan, commencing on the 1st day of October, 1997. If not
sooner repaid, the entire outstanding principal balance of the
Loan, together with all accrued but unpaid interest thereon, shall
be due and payable in full on the 1st day of March, 1998.
3. Anything in this letter, or in the Note, to the contrary
notwithstanding, it is understood and agreed that Borrower shall
have no right to receive, and Lender shall have no obligation to
make, any advance of Loan proceeds hereunder and/or under the Note
in the event that, and so long as:
(a) any default or event of default under the Note or this
Letter shall have occurred and shall then be continuing; or
(b) any act, omission, event or circumstance which, with the
passage of time or the giving of notice or both would constitute a
default or event of default under the Note or this Letter, shall
have occurred and shall then be continuing.
4. In order to induce Lender to make the Loan to Borrower, and as
additional consideration to Lender in connection therewith,
Borrower has agreed as follows:
(a) Simultaneously with the execution and delivery of the
Note, Borrower shall issue to Lender a warrant (the "50,000 Share
Warrant") to purchase and acquire 50,000 shares of the common stock
of Borrower for a purchase price of $2.35 per share. The 50,000
Share Warrant shall expire, if not sooner exercised, on the third
anniversary of the date of the Note. The form, content, terms and
provisions of the 50,000 Share Warrant shall be satisfactory to
Lender, in Lender's reasonable discretion.
(b) Unless (x) the indebtedness evidenced by the Note shall
have theretofore been repaid in full, and (y) Borrower shall have
theretofore agreed to terminate and relinquish any and all further
rights to borrow funds from Lender under the revolving credit
facility referred to above, then:
(i) on the 90th day following execution and delivery of
the Note, Borrower shall issue to Lender a warrant (the "90 Day
Warrant") to purchase and acquire the following additional shares
of the common stock of Borrower:
(aa) if the outstanding principal balance of the
indebtedness evidenced by the Note shall then be equal to or
greater than $500,000.00, then the 90 Day Warrant shall grant to
Lender the right to purchase and acquire 5,000 shares of the common
<PAGE>
stock of Borrower for a purchase price of $2.35 per share; or
(bb) if the outstanding principal balance of the
indebtedness evidenced by the Note shall then be less than
$500,000.00, then the 90 Day Warrant shall grant to Lender the
right to purchase and acquire 2,500 shares of the common stock of
Borrower for a purchase price of $2.35 per share.
The 90 Day Warrant shall expire, if not sooner
exercised, on the third anniversary of the date of the Note; and
(ii) on the 120th day following execution and delivery of
the Note, Borrower shall issue to Lender a warrant (the "120 Day
Warrant") to purchase and acquire the following additional shares:
(aa) if the outstanding principal balance of the
indebtedness evidenced by the Note shall then be equal to or
greater than $500,000.00, then the 120 Day Warrant shall grant to
Lender the right to purchase and acquire 5,000 shares of the common
stock of Borrower for a purchase price of $2.35 per share; or
(bb) if the outstanding principal balance of the
indebtedness evidenced by the Note shall then be less than
$500,000.00, then the 120 Day Warrant shall grant to Lender the
right to purchase and acquire 2,500 shares of the common stock of
Borrower for a purchase price of $2.35 per share.
The 120 Day Warrant shall expire, if not sooner
exercised, on the third anniversary of the date of the Note; and
(iii) on the 150th day following execution and delivery of
the Note, Borrower shall issue to Lender a warrant (the "150 Day
Warrant") to purchase and acquire the following additional shares
of the common stock of Borrower:
(aa) if the outstanding principal balance of the
indebtedness evidenced by the Note shall then be equal to or
greater than $500,000.00, then the 150 Day Warrant shall grant to
Lender the right to purchase and acquire 5,000 shares of the common
stock of Borrower for a purchase price of $2.35 per share; or
(bb) if the outstanding principal balance of the
indebtedness evidenced by the Note shall then be less than
$500,000.00, then the 150 Day Warrant shall grant to Lender the
right to purchase and acquire 2,500 shares of the common stock of
Borrower for a purchase price of $2.35 per share.
The 150 Day Warrant shall expire, if not sooner
exercised, on the third anniversary of the date of the Note; and
(iv) on the 180th day following execution and delivery of
the Note, Borrower shall issue to Lender a warrant (the "180 Day
Warrant") to purchase and acquire the following additional shares
of the common stock of Borrower:
<PAGE>
(aa) if the outstanding principal balance of the
indebtedness evidenced by the Note shall then be equal to or
greater than $500,000.00, then the 180 Day Warrant shall grant to
Lender the right to purchase and acquire 5,000 shares of the common
stock of Borrower for a purchase price of $2.35 per share; or
(bb) if the outstanding principal balance of the
indebtedness evidenced by the Note shall then be less than
$500,000.00, then the 180 Day Warrant shall grant to Lender the
right to purchase and acquire 2,500 shares of the common stock of
Borrower for a purchase price of $2.35 per share.
The 180 Day Warrant shall expire, if not sooner
exercised, on the third anniversary of the date of the Note.
The form, content, terms and provisions of each of warrants
referred to in this Subparagraph 4(b) shall be satisfactory to
Lender, in Lender's reasonable discretion.
Kindly countersign this letter in the place designated below to
acknowledge and confirm your agreement to the foregoing terms and
conditions.
Very truly yours,
/s/ H. Irwin Levy
Confirmed, Acknowledged and Agreed:
nSTOR TECHNOLOGIES, INC.
By: /s/ Mark F. Levy
___________, ____ President
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000075448
<NAME> NSTOR TECHNOLOGIES, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 1,120<F1>
<SECURITIES> 0
<RECEIVABLES> 4,855
<ALLOWANCES> 47
<INVENTORY> 7,055
<CURRENT-ASSETS> 13,417
<PP&E> 7,357<F2>
<DEPRECIATION> 653<F3>
<TOTAL-ASSETS> 20,121
<CURRENT-LIABILITIES> 9,171
<BONDS> 0
0
0
<COMMON> 934
<OTHER-SE> 9,471
<TOTAL-LIABILITY-AND-EQUITY> 20,121
<SALES> 20,527
<TOTAL-REVENUES> 20,630
<CGS> 14,127
<TOTAL-COSTS> 8,804
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 111
<INCOME-PRETAX> (2,412)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,412)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,412)
<EPS-PRIMARY> (.13)
<EPS-DILUTED> 0
<FN>
<F1>Cash balance includes $1,004 of restricted cash.
<F2>PP&E includes $5,259 of goodwill and other intangible assets.
<F3>Depreciation includes $312 of accumulated amortization.
</FN>
</TABLE>
