SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
---------------------
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
_______ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number: 08354
nStor Technologies, Inc.
(exact name of registrant as specified in its charter)
Delaware 95-2094565
(State of Incorporation) (I.R.S. Employer ID No.)
100 Century Blvd., West Palm Beach, Florida 33417
(Address of principal executive offices)
Registrant's telephone number, including area code: 561-640-3103
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.05 per share
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the Registrant was required to file
such reports) and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
<PAGE>
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. [X]
AGGREGATE MARKET VALUE OF THE VOTING STOCK
HELD BY NONAFFILIATES OF THE REGISTRANT
Common Stock, par value $.05 per share ("Common Stock"), was the
only class of voting stock of the Registrant outstanding on
December 31, 1997. Based on the last sales price of the Common
Stock on the American Stock Exchange ("AMEX") on March 31, 1998
(1-3/16), the aggregate market value of the approximately
12,564,000 shares of the Common Stock held by persons other than
officers, directors and persons known to the Registrant to be the
beneficial owners (as that term is defined under the rules of the
Securities and Exchange Commission) of more than five percent of
the Common Stock on that date was approximately $14.9 million. By
the foregoing statements, the Registrant does not intend to imply
that any of these officers, directors or beneficial owners are
affiliates of the Registrant or that the aggregate market value, as
computed pursuant to rules of the Securities and Exchange
Commission, is in any way indicative of the amount which could be
obtained for such shares of Common Stock.
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the Registrant has filed all
documents and reports required to be filed by Section 12, 13, or
14(d) of the Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a court.
Yes ____ No __X__
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
Indicate the number of shares outstanding of each of the
Registrant's classes of common stock, as of the latest practicable
date:
18,670,477 shares of Common Stock, par value $.05
per share, were outstanding as of March 31, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
Definitive Proxy Statement of nStor Technologies, Inc.
for the 1998 Annual Meeting of Stockholders
(incorporated in Part III)
2
<PAGE>
PART I
Item 1. Business
General
nStor Technologies, Inc. through its operating subsidiary, nStor
Corporation, Inc. (collectively, the "Company") is engaged as a
manufacturer and supplier of information storage solutions,
including external RAID (Redundant Array of Independent Disks)
subsystems and data storage enclosures (the "RAID Business"),
UNIX-based memory products, storage management hardware and
software, digital media products, and Enterprise Resource Planning
("ERP") manufacturing solutions. The Company's RAID subsystems
provide users with high capacity, fault-tolerant storage, allow
uninterrupted access to data and support a variety of operating
system environments, including Novell NetWare, Microsoft NT Desktop
and Server, SCO UNIX, SGI Irix, Sun Soloris, IBM OS/2 LAN (local
area network) Server, and IBM OS/2 WARP. The RAID subsystems
provide data storage solutions, particularly for applications
requiring substantial storage performance and capacity, such as
document imaging, video and multimedia, or transaction-intensive
environments, such as banking and order entry systems. The
Company's RAID products are sold through a network of original
equipment manufacturers ("OEM's") and distributors/resellers
located worldwide.
The Company's Integrated Systems Division ("ISD") provides
manufacturing information technology in the form of ERP software to
certain manufacturers using one or more manufacturing processes.
ISD also develops and markets a data-collection integration
software system and an activity-based costing software module. ISD
is responsible for the implementation, customization, education and
training, as well as the on-going technical support for its ERP
solution.
The Company has a licensing agreement in place with Silicon
Graphics, Inc. ("SGI"), which expires June 30, 1999, to produce
single inline memory modules (SIMMs) and dual inline modules
(DIMMs) for SGI workstations and supercomputer systems. The
license encompasses the three main server markets SGI builds
products for and covers all the memory modules currently licensed
to third parties. The Company pays up to 35% of net sales as a
license fee to SGI on a quarterly basis. The Company also
manufactures and produces memory modules for the Sun, Hewlett
Packard and Digital Equipment Corporation workstations and server
markets on an ongoing basis.
3
<PAGE>
The Company maintains its executive offices at 100 Century
Boulevard, West Palm Beach, Florida 33417 and its telephone number
is (561) 640-3103. The Company's operating subsidiary has its
business headquarters at 450 Technology Park, Lake Mary, Florida
32746 and its telephone number is (407) 829-3500. Information
regarding the Company can be accessed through the World Wide Web at
http:// www.nstor.com.
RECENT DEVELOPMENT - DEFINITIVE AGREEMENT TO ACQUIRE THE ASSETS OF
BORG ADAPTIVE TECHNOLOGIES, INC. ("Borg")
Effective February 27, 1998, the Company signed a definitive stock
purchase agreement to acquire all the outstanding common stock of
Borg, a privately owned company headquartered in Boulder, Colorado.
The purchase price consists of $350,000 in cash, including the
retirement of $325,000 in debt, and the issuance of a warrant to
purchase 400,000 shares of the Company's Common Stock at $1.38.
The acquisition is expected to close in mid-April 1998.
Borg is engaged in the development of patented, next-generation
RAID technologies that offer both incremental RAID performance and
greater ease-of-use features. If consummated, the Borg acquisition
will enable the Company to further differentiate its RAID products
in the rapidly expanding, mid-range Windows NT and UNIX markets.
RAID TECHNOLOGY
RAID, a concept developed in 1988 by a team of researchers from the
University of California at Berkeley, is an emerging storage
technology consisting of two or more disk drives working together
as one, using proprietary hardware, firmware and software to
achieve extremely fast data transfer and I/O rates (see below),
high levels of redundancy and large storage capacities. The key
characteristics of RAID subsystems' performance are as follows:
Data Transfer Rate. RAID subsystems are able to achieve much
faster data transfer rates than individual disk drives because of
their ability to spread data among all of the component disk drives
and retrieve the data from all drives simultaneously at very fast
speeds. The Company's RAID subsystems can achieve data transfer
rates of up to 200 million bytes of data per second.
Input/Output (I/O) Rate. RAID subsystems are able to achieve
much faster I/O rates than individual disk drives because of their
ability to spread I/O's among all of the component disk drives. An
I/O represents a user-requested read or write of data from the
disk. The Company's RAID subsystems can achieve I/O rates of up to
4,000 I/O's per second.
4
<PAGE>
Redundancy. Redundancy refers to the replication of certain
data within the RAID subsystem so that if one disk drive or other
redundant component, such as a power supply, fails within the disk
array, no data is lost and the application continues uninterrupted.
In the event of such a failure, the failed component can be
"hot-swapped" for a new component (exchanged without necessitating
taking down the system).
Storage Capacity. By linking together multiple disk drives,
RAID subsystems significantly enhance storage capacities. The
Company's disk arrays are able to store up to several hundred
terabytes (TB) of data. Although storage capacity varies with
individual host configuration, the Company's disk arrays can be
used to store up to approximately 400 TB's of data assuming
multiple enclosures and multiple host connections.
Multiple levels of RAID have been defined by the research team from
Berkeley, which levels have been endorsed by The RAID Advisory
Board, an industry advisory board organized in 1993. The levels
are differentiated by the manner in which they write data to the
disks. Below is a brief explanation of those levels utilized by
the Company's product line:
Level Technology Benefits Applications
RAID O Disk striping - Parallel disk I/O Those requiring high
data is written for fast perform- performance, but no
across multiple ance, maximized fault-tolerance, video
disk drives. storage capacity, editing, temporary
low up-front cost. data base scratch
areas.
RAID 1 Disk mirroring - Complete data re- Small servers (<20
duplicate data dundancy, easy to gigabytes (GB)),
is written to implement, fast systems requiring
two separate read/write maximum performance
drives. performance. with fault-tolerance.
RAID 3 Striping & parity - Enhanced performance Optimal for applications
data is striped for single user, in which large blocks of
across drives and sequential file sequential data must be
parity is main- systems. transferred quickly,
tained on a dedi- such as real-time audio/
cated parity drive. video, document imaging.
RAID 5 Disk striping Fault tolerance, Multi-user, OLTP (On Line
of both data efficient storage, Transaction Processing),
and parity data excellent perfor- LAN servers >12GB re-
across multiple mance in transac- quiring fault-tolerance.
disks. tion processing
environments.
5
<PAGE>
RAID 10 Combination of Fast performance Those that can justify
RAID O and 1 - and complete 100% redundancy of
data is striped redundancy. mirrored arrays and
across disks as the needs of the
in RAID O and enhanced I/O perform-
each disk has a ance of striped
mirror disk as in arrays.
RAID 1.
RAID 50 Combination of Fast performance. Those requiring highly
RAID O and 5. reliable storage, high
request rates, and high
data transfer
performance.
Connor Storage Systems Group, which previously owned the Company's
RAID Business, co-developed (with Intel Corp.) the SAF-TE (SCSI
(Small Computer System Interface) Accessed Fault-Tolerant
Enclosures) specification. SAF-TE is an industry-wide standard
means of status reporting and control for storage subsystems which
facilitates local and remote automated alert notification
particularly for customers using high volume servers. SAF-TE
facilitates integration by system manufacturers of servers,
peripheral packaging and controllers by providing an open, low-cost
non-proprietary specification for communicating with fault-tolerant
enclosures. The SAF-TE specification allows system administrators
to monitor the status of all vital components of the entire
computer memory subsystem, including the disk drives, power
supplies and cooling fans, in contrast to many other RAID
subsystems which only report disk drive failures.
INDUSTRY
Given the growth of processing power and network capabilities,
worldwide demand for storage and RAID-based subsystems is
continuing to increase. According to DataQuest, a unit of Gartner
Group, Inc. that provides global market research and consulting
services for the information technology industry, estimated network
and RAID-based storage revenue will approach $20 billion in 1998.
The market is also forecasted to show strong growth through the
rest of the decade, with DataQuest forecasting storage revenues to
surpass $25.6 billion in the year 2000.
RAID technology continues to be an effective tool to protect
network computer users from the loss of critical disk data.
Management believes that RAID subsystems will continue to play a
significant role as the preferred vehicles for data storage in
network environments. Management also believes that the Company is
well positioned to provide fault-tolerant information storage
systems to all segments of the market and will be able to
6
<PAGE>
participate in the forecasted growth in the information storage
market. However, there can be no assurance that the Company will
be successful in these efforts due to the possibility of increased
competition, the advancement of alternative technologies, and other
factors.
In addition to revenues generated from RAID subsystems, the Company
is also engaged in the manufacture and sale of memory modules. The
worldwide revenue for DRAM (Dynamic Random Access Memory) and SDRAM
(Synchronous Dynamic Random Access Memory) is expected to continue
growing. The Company maintains limited inventory in both DRAM and
SDRAM, in effect hedging against what has been precipitous declines
in cost during earlier years. The Company has chosen not to
participate in the highly volatile Intel PC market place but
instead to concentrate its resources in the Unix and mid-range
environments with which there is a certain growth relationship with
storage.
A third product line offered through the Company's ISD provides
revenues from the sale, implementation, customization, education
and training and on-going technical support for its ERP solutions,
including ROI Systems, Inc. Manage2000 software and the Company's
internally developed Collect2000 and AEDI (Automotive Electronic
Data Interchange) software. These products are year 2000
compliant.
PRODUCTS
Listed below is a summary of the Company's disk subsystem products.
List
Price
Product Description and Features Range (a)
CR 8e 8-bay rack-mountable or deskside tower $6,610-
Series SAF-TE compliant RAID subsystem containing $18,910
4, 9 or 18 GB disk drives (up to 144 GB's of
storage per enclosure). May be configured
for RAID levels 0, 1, 3, 5, 10 or 50.
Hot-swappable disk drives, power supplies
and cooling fans, on-the-fly disk capacity
expansion and RAID level migration. Supports
Ultra SCSI extension and Ultra/Wide SCSI-3
with data transfer rates of up to 40 MB's
per second.
CR 8L 8-bay rack-mountable or deskside tower $7,000-
Series SAF-TE compliant RAID subsystem containing $19,999
4, 9 or 18 GB disk drives (up to 144 GB's of
storage per enclosure). May be configured
for RAID levels 0, 1, 3, 5, 10 or 50.
Hot-swappable disk drives, power supplies
7
<PAGE>
and cooling fans, on-the-fly disk capacity
expansion and RAID level migration. Supports
LVD (Low Voltage Differential)SCSI-3 with
data transfer rates of up to 80 MB's per
second.
CR 8F 8-bay rack-mountable or deskside tower $9,570-
Series SES compliant subsystem containing 4, 9 $24,500
or 18 GB disk drives (up to 144 GB's of
storage per enclosure). Positioned as a
Fibre Channel JBOD (Just a Bunch of Drives),
the CR8F supports data transfer rates of
up to 200 MB's per second.
CR 18F 18-bay rack-mountable SES compliant $9,900-
Series subsystem containing 4, 9 or 18 GB disk $47,500
drives (up to 324 GB's of storage per
enclosure). Positioned as a Fibre Channel
JBOD and supports data transfer rates of up
to 200 MB's per second.
CR 8j 8-bay desktop subsystem containing 4, 9 $5,425-
Series or 18 GB disk drives (up to 144 GB's of $11,700
storage per enclosure). Positioned as a
JBOD, supports Ultra SCSI extension and
Ultra/Wide SCSI-3 with data transfer
rates of up to 40 MB's per second.
________
(a) The lower list price reflects an enclosure with the minimum
of three drives included; the higher list price reflects an
enclosure which contains the maximum number of drives for
that enclosure.
Listed below is a summary of the Company's memory products,
organized by supplier:
Digital Equipment
Silicon Graphics Sun Microsystems Corporation
Challenge Sparc 20, 20M, Sparcserver 20 Model 433A
Indy 4000 series Sparcserver 630MP, 670MP, 690MP Alphaserver 2000
Indigo Extreme Sparcserver 1000 Alphastation 600
Indigo/Power Indigo Sparcserver 2000 Celbris
Power Indigo 2 Ultra AX
O2 Ultra Sparc 1 Model 170, 140
Octane Ultra Enterprise 1, Ultra Hewlett Packard
Origin 200 Sparc 30, 150 Vectra series
Origin 20000 Ultra Sparc/Enterprise 2 Net server series
Cray 2000 Ultra Sparc 5, 10 Net server 4's
Onyx 2 Ultra 3000, 4000 Net server 5's
Challenge L Ultra Enterprise 3000, HP9000 700 series
Power Challenge 4000, 5000, 6000 HP9000 C,J and K series
8
<PAGE>
PRODUCT DISTRIBUTION AND CUSTOMERS
The Company's products are marketed and sold as an alternative to
products offered by server vendors, as part of a team-based sales
strategy utilizing traditional sales channels and territories.
Although three distinct sales channels exist within the Company's
sales strategy, OEM's, national accounts, and distribution, OEM and
national account channels are combined since they require similar
sales strategies, account management, pricing and support.
The OEM channel is significant in terms of revenue opportunity,
market visibility and credibility (OEM-grade supplier) and as a
proving ground for new technologies that can later be marketed and
sold in the distribution channel. OEMs are strategic in nature and
therefore require unique sales strategies and support. The Company
utilizes a multi-tiered sales and support structure to support and
recruit OEMs. This tightly coupled structure includes the sales
organization as well as the technical/product marketing,
manufacturing and engineering organizations. OEMs and national
account sales accounted for 17% and 70%, respectively, of the
Company's sales for the year ended December 31, 1997.
The distribution channel is arranged by specific geographical
territories, each being assigned a regional manager, multiple
district managers as well as an inside account manager (ISAM). To
maximize the Company's visibility within each territory, regional
and district managers are located within their respective
territories and are supported by corporate-based ISAMs. In order
to promote team-based selling, specific sales quotas are assigned
to specific territories.
To ensure the completeness of territorial coverage, the Company
selectively places manufacturer's representatives in certain areas
such as Washington, DC and Dallas, Texas. Managed by the
territorial district managers, manufacturer's representatives will
be selected based on product focus, customer base and experience.
The sales model for product distribution in Europe is closely
aligned with the domestic model. Western European geographical
territories are targeted by sales personnel based in Britain with
the largest concentration of effort targeted towards the largest
two European IT (Information Technology) markets, Germany and
Britain. These sales personnel are also used to assist with
European OEM activity.
9
<PAGE>
Each sales channel is supported by complementary pricing and margin
structures. This strategy allows the Company and its customers to
effectively sell and market its products across multiple channels
while still maintaining channel integrity. Distribution accounted
for 13% of the Company's sales for the year ended December 31,
1997.
SALES AND MARKETING
Sales. The Company sells its products primarily through its
OEM, national account, regional and direct sales force which
consisted of 27 employees at December 31, 1997, two of whom are
located in Britain. The sales organization recruits new resellers,
supports existing resellers, markets products to OEMs and system
integrators and participates in trade shows.
Marketing. The Company's marketing plan utilizes a variety
of programs to market its products. The focal points of this plan
include further development and promotion of the distribution
channel, strategic media placement, active regional, national and
international tradeshow participation, continued aggresive public
relations, development of highly focused printed materials such as
brochures and continued Web site innovation.
TECHNICAL SUPPORT AND CUSTOMER SERVICE
Management believes that its ability to provide prompt and reliable
technical support has significantly enhanced its marketing efforts.
A toll-free telephone number is provided for support to all OEM's,
wholesale distributors and end users. The Company employs an
engineering and support staff (31 people as of December 31, 1997)
all of whom have extensive training and strive to work with all
levels of distribution and end users in order to satisfy its
customers.
In addition, the Company provides a limited three-year warranty
which permits customers to return for repair or replacement all
enclosures not operating as warranted. Disk drives are warranted
for five years through the manufacturer. Thus far, the Company has
not experienced material warranty claims; however, there can be no
assurance that warranty claims will not have a material adverse
effect on future operating results.
MANUFACTURING AND SUPPLIERS
The Company assembles its products from components and
prefabricated parts, such as controllers, cabinets, multiple disk
10
<PAGE>
drives and power supplies, manufactured and supplied by others.
Strategic relationships have been established with certain of the
Company's suppliers to manage inventory in such a manner that
facilitates changing customer needs. The Company has an OEM
relationship with Seagate Techology, which it believes is a
reliable source of disk drives, and a license agreement with Intel,
which allows incorporation of the SAF-TE specification into the
Company's products (see Item 1. Business - RAID Technology). The
license agreement has no specific term and does not require any
specific payments. Management believes that there are a sufficient
number of suppliers available to meet its manufacturing needs and
that the INTEL/SAF-TE relationship enhances its ability to market
the Company's product line.
The sophisticated nature of the Company's products requires
extensive testing by skilled personnel. The Company utilizes
specialized testing equipment and maintains an internal test
engineering group of three people to provide this product support.
BACKLOG
The Company manufactures its products based on a forecast of
near-term demand and maintains inventory in advance of receipt of
firm orders from customers. Shipments are generally made shortly
after receipt of a firm order. Customers may reschedule orders
with little or no penalty. As a result, the Company's backlog at
any given time is not necessarily indicative of future sales
levels.
RESEARCH AND DEVELOPMENT
The Company operates in an industry, which is subject to rapid
technological change. Its ability to compete successfully is
largely dependent upon the timely development and introduction of
products and its ability to anticipate and respond to change. The
Company uses engineering design teams that work with marketing
managers, application engineers and customers to develop products
and product enhancements. Computer I/O interface standards are
maintained and an extensive disk drive qualification program is in
place to monitor disk drives to ensure the quality and performance
of the disk drives integrated into the Company's disk arrays. As
part of its development strategy, the Company actively seeks
available, cooperative and co-development activities with industry
leaders in the hardware, software and systems businesses.
Research and development expenses during the year ended December
31, 1997 amounted to $2.6 million, all of which were expensed as
incurred. As of December 31, 1997, the Company had 21 full-time
employees engaged in research and development.
11
<PAGE>
COMPETITION
The market for all levels of RAID subsystems is subject to intense
competition. The Company competes not only with other disk array
manufacturers, but also with manufacturers of proprietary,
integrated computer systems and system integrators which sell
computer systems containing general purpose RAID subsystems, some
of which may have significantly greater financial and technological
resources or larger distribution capabilities than the Company.
Such competitors may offer their products at lower sales prices
than the Company; accordingly, the Company must often compete on
the basis of product quality, performance and reliability in
specific applications. The Company's continued ability to compete
will largely depend upon its ability to continue to develop high
performance products at competitive prices while continuing to
provide superior technical support and customer service.
EMPLOYEES
As of December 31, 1997, the Company employed 111 full-time
employees, of which 31 were involved in engineering, product
development and technical support, 33 in sales and marketing, 31
in manufacturing and operations, and 16 in finance, management and
administration. The Company's employees are not covered by a
collective bargaining agreement, there have been no work stoppages
and management believes its employee relations are good.
Management believes that the future success of the Company will
largely depend upon its ability to continue to attract, employ and
retain competent qualified technical, marketing and management
personnel. Experienced personnel are in great demand and the
Company must compete with other technology firms, some of which may
offer more favorable economic incentives to attract qualified
personnel.
CERTAIN TRANSACTIONS AND RELATIONSHIPS
Hilcoast Advisory Services, Inc. ("Advisor")
Since July 1, 1996, Advisor has provided certain financial
consulting and administrative services to the Company under an
agreement which expires June 30, 1998, as extended, provides for
the payment of $6,000 per month, plus reimbursement for all
out-of-pocket expenses, and which may be terminated by the Company
upon 60 days notice and by Advisor upon 180 days notice. H. Irwin
Levy, a director and principal shareholder of the Company, is the
Chairman of the Board, Chief Executive Officer and a majority
shareholder of Advisor's parent. Management believes that the
terms of this agreement are no less favorable to the Company than
those that would be received from other sources.
12
<PAGE>
Intelligent Manufacturing Systems, Inc. ("IMS")
R. Daniel Smith, a director of the Company, was also the Chief
Executive Officer and sole shareholder of IMS, which specialized in
providing software solutions. In July 1996, the Company purchased
an integrated software package from IMS, including installation,
consulting and training support, at a cost of approximately
$272,000. The software package was purchased to facilitate the
Company's internal operations and includes finance, planning and
production, sales and marketing, service and engineering modules.
In June 1997, the Company acquired the assets of IMS for
approximately $135,000 which was based on the debt free net book
value of the assets acquired. Management believes that the terms
of these transactions were no less favorable to the Company than
those that would be paid to other vendors.
Item 2. Properties
The Company leases approximately 40,000 square feet of office and
warehouse space in Lake Mary, Florida, under lease agreements for
22,000 square feet and 18,000 square feet, which expire in April
2000 and February 2002, respectively, at present annual base rents
of approximately $150,000 and $116,000, respectively. The larger
facility accommodates administration and management, engineering,
sales and marketing. The smaller facility accomodates
manufacturing and technical support. The Company believes that its
existing facilities are adequate to meet its future needs.
The Company also leases office suites in Los Gatos and Costa Mesa
California; Huntington, New York; Atlanta, Georgia; Richmond Hill,
Ontario, Canada and Bedford, England under leases which expire from
1998 to 2000. The Company's executive offices consist of a minor
amount of space located in West Palm Beach, Florida.
Item 3. Legal Proceedings
In June 1996, Jack Ehrenhuas, Mark Schindler, Eugene Stricker,
Amnon Damty, Ehud Mendelson and Susan Felton filed a Complaint in
the Supreme Court of the State of New York, County of Nassau,
against the Company and its Chairman, Michael Wise. The plaintiffs
claim to have contractual and proprietary interests in the prospect
of a transaction to purchase certain net assets acquired by the
Company (see Note 2 to Consolidated Financial Statements) and seek
compensatory damages plus punitive damages.
13
<PAGE>
In August 1996, The Nais Corporation, Mark Schindler, Eugene
Stricker, Amnon Damty, Ehud Mendelson and Susan Felton filed a
Complaint in the same Court making similar allegations against a
subsidiary of the Company, its president R. Daniel Smith, and IMS.
In this action, the plaintiffs seek compensatory damages plus
punitive damages for alleged breach of contract.
Both cases are currently in discovery. Counsel for the Company
believes that the Company has good defenses to both claims and that
it will not incur any material liability. The Company is unaware
of any facts that would support any of the plaintiffs' claims and,
accordingly, the Company believes that the claims are without
merit.
From time to time, the Company is subject to legal proceedings and
other claims arising in the ordinary course of business. In the
opinion of management, the Company is not a party to any litigation
the outcome of which would have a material adverse effect on its
business or operations.
Item 4. Submission of Matters to a Vote of Security Holders
The Company did not submit any matters to the vote of its security
holders during the fourth quarter of fiscal 1997.
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters
The Company's Common Stock commenced trading on the American Stock
Exchange ("AMEX") on April 18, 1997 under the symbol NSO. Prior to
that date, the Company's Common Stock traded on the over-the-counter ("OTC")
market under the symbol NSTT. The following table
sets forth the market price range of the Common Stock for each
quarter during the years ended December 31, 1997 and 1996, based on
the high and low closing sales prices as reported by AMEX or the
National Association of Securities Dealers' Automated Quotation
System. The Company has not paid any dividends and does not expect
to pay any dividends in the near future. In addition, certain of
the Company's borrowings provide for restrictions on the payment of
dividends.
14
<PAGE>
Market Price Range
--------------------
1997 High Low
---- -------- --------
First quarter 2-25/32 1-7/8
Second quarter 2-15/16 1-3/4
Third quarter 2-5/16 1-9/16
Fourth quarter 2-3/4 1-5/8
1996
----
First quarter 11/16 7/16
Second quarter 1-3/4 9/16
Third quarter 2-1/32 1-1/16
Fourth quarter 3-1/8 2
As of December 31, 1997, the Company had 18,670,477 shares of
Common Stock outstanding and approximately 2,120 holders of record
of such stock.
Item 6. Selected Financial Data
(dollars in thousands, except per share data)
The following table summarizes certain selected consolidated
financial data for the Company for the year ended December 31,
1997, for the two month transition period ended December 31, 1996,
and for each of the years ended in the four year period ended
October 31, 1996. 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 for years prior to
fiscal 1997 have been reclassified to conform to the 1997
presentation. These reclassifications had no impact on operating
results previously reported. The selected financial data has been
derived from the Company's audited consolidated financial
statements and is qualified by reference to, and should be read in
conjunction with, the Consolidated Financial Statements and Notes
thereto and "Management's Discussion and Analysis of Financial
Condition and Results of Operations", included elsewhere in this
report:
15
<PAGE>
<TABLE>
<CAPTION>
Two
Year Months
Ended Ended Year Ended October 31,
Dec. 31, Dec. 31 -------------------------------------------
1997 1996 1996 1995 1994 1993
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net sales $26,244 $ 4,739 $ 5,619 $ - $ - $ -
Gross profit 4,783 1,348 2,072 - - -
Net income
(loss) (7,886) (43) 12,798(1) (61) 272 (802)
Basic and
diluted net
income (loss)
per common
share (.42) (.00) .73 (.00) .02 (.05)
Average number
of common
shares
outstanding 18,670,477 18,670,477 17,606,477 17,600,477 17,600,477 17,600,477
At end of period:
Working
capital
(deficit) ($1,434) $5,852 $11,045 $11,408 ($586) ($567)
Total assets 16,762 20,067 15,677 12,054 26 37
Long-term
debt 1,504 516 510 476 444 735
Shareholders'
equity
(deficit) 5,037 12,817 12,390 10,932 (1,030) (1,302)
</TABLE>
----------
(1) Principally consists of $11,955 gain from the sale of IMNET stock
(see Note 3 to Consolidated Financial Statements). Also includes
extraordinary gain of $566 ($.03 per basic and diluted share).
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Overview
With the exception of discussion regarding historical information,
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" contains forward looking statements. Such
statements are based on current expectations subject to
uncertainties and other factors which may involve known and unknown
16
<PAGE>
risks that could cause actual results of operations to differ
materially from those projected or implied. Further, certain
forward looking statements are based upon assumptions about future
events which may not prove to be accurate.
Risks and uncertainties inherent in forward looking statements
include, but are not limited to, the Company's future cash flows
and ability to obtain sufficient financing, timing and volume of
sales orders, level of gross margins and operating expenses, lack
of market acceptance of the Company's new product lines, price
competition, conditions in the technology industry and the economy
in general, as well as legal proceedings. The economic risk
associated with materials cost fluctuations and inventory
obsolescence is significant to the Company. The Company's ability
to manage its inventories through procurement and utilization of
component materials could have a significant impact on future
results of operations or financial condition. Historical results
are not necessarily indicative of the operating results for any
future period.
Subsequent written and oral forward looking statements attributable
to the Company or persons acting on its behalf are expressly
qualified in their entirety by cautionary statements in this Form
10-K and in other reports filed by the Company with the Securities
and Exchange Commission. The following discussion should be read
in conjunction with the Consolidated Financial Statements and the
Notes thereto included elsewhere in this filing.
The Company acquired the RAID Business in June 1996 from Seagate
Peripherals, Inc. (see Note 2 to Consolidated Financial
Statements). In December 1996, the Company acquired substantially
all the net assets of Parity Systems, Inc. (the "Parity
Acquisition", see Note 2 to Consolidated Financial Statements). As
a result, the Company is engaged as a manufacturer and supplier of
information storage solutions, including external RAID subsystems
and data storage enclosures, UNIX-based memory products, storage
management hardware and software, digital media products, and
enterprise resource planning manufacturing solutions. Allocations
have been made to reflect the estimated fair values of the net
assets acquired resulting in asset bases which differ from those of
the previous owners. In addition, certain operating policies and
accounting procedures are different from those of the previous
owner. Accordingly, comparative financial data of the acquired
businesses for periods prior to the acquisitions are not presented
in this section since they would be neither comparable nor
informative.
Prior to the first acquisition in June 1996, the Company's only
assets were securities issued by IMNET Systems, Inc. ("IMNET" - see
Note 3 to Consolidated Financial Statements), which the Company had
acquired in October 1992 in exchange for substantially all of the
Company's operating assets. During the time in which the Company
17
<PAGE>
owned the IMNET securities, the Company's only activities consisted
of monitoring its investment in IMNET and evaluating potential
business opportunities.
Results of Operations
The following table sets forth, for the periods indicated, certain
operating data as a percentage of net sales revenue (fiscal 1995
data is not presented since there were no net sales revenues for
the reasons previously discussed):
Two Months Year
Year Ended Ended Ended
December 31, December 31, October 31,
1997 1996 1996
------------ ------------ -----------
Net sales revenue 100% 100% 100%
Cost of sales 82 72 63
---- ---- ----
Gross margin 18 28 37
Selling, general and
administrative 37 24 22
Research and
development 10 6 13
---- ---- ----
Income (loss) from
operations (29) (2) 2
Interest income, net - 1 3
---- ---- ----
Income (loss) before
income taxes (29%) (1%) 5%(a)
==== ==== ====
____________
(a) Percentage of income before income taxes excludes gains from
non-recurring transactions such as the gain reported from the
sale of IMNET Systems, Inc. stock of $11,955,000 and the
extraordinary gain from debt extinguishment of $566,000.
Fiscal Years Ended December 31, 1997 and October 31, 1996
The Company reported a net loss of $7.9 million for the year ended
December 31, 1997 as compared to net income of $12.8 million for
the year ended October 31, 1996. For the two month transition
period ended December 31, 1996, the Company reported a net loss of
$43,000.
Results of operations for fiscal 1996 included a gain of
$11,955,000 resulting from the disposition of 100% of the Company's
18
<PAGE>
investment in IMNET (see Note 3 to Consolidated Financial
Statements) and an extraordinary gain of $566,000 on extinguishment
of debt (see Note 7 to Consolidated Financial Statements).
Sales
Net sales increased to $26.2 million for fiscal 1997 from $5.6
million for the year ended October 31, 1996. From January 1,1996
until the Company's initial acquisition in June 1996, there were no
net sales reported by the Company. Accordingly, the year ended
October 31, 1996 included net sales revenue for the initial five
months of operation of the RAID Business and does not include net
sales revenues generated from the Parity Acquisition effective
December 1, 1996. Net sales revenues for the two month transition
period amounted to $4.7 million and included only one month of
sales revenues resulting from the Company's Parity Acquisition.
Sales levels were adversely affected during 1997 by delays in
completing the integration of the Company's new product CR8e RAID
subsystem. The Company was dependent upon the development of a
third party controller product that was delivered to the Company
more than six months late. This delay resulted in reduced sales
volume and pricing for the Company's CR8e subsystem. The Company
also suffered disruptions in manufacturing associated with the
transfer and integration of production from California to Florida
as necessitated by the Company's Parity Acquisition. Future sales
are expected to be positively affected by the introduction and
availability of certain new products, completion of several new
agreements with new OEM's, and the delivery of the late controller
card.
Cost of Sales/Gross Margins
Gross margins for the year ended December 31, 1997 decreased to 18%
from 37% for the year ended October 31, 1996. Gross margins for
the two month transition period ended December 31, 1996 were at
28%. The Company's gross margins are dependent, in part, on
product mix which will fluctuate from time to time. Reduced gross
margins for 1997 are primarily the result of an approximate $2.9
million write-down of inventory resulting from a re-valuation of
certain inventory acquired in the Parity Acquisition, potential
obsolete inventory and transitional issues associated with the
implementation of a new materials requirement planning (MRP)
system, 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 an improvement in
gross margins during 1998 due to increased product cost
efficiencies, more effective management of procurement and
utilization of component materials and concentrated sales efforts
on higher margin enhanced products.
19
<PAGE>
Operating expenses
Operating expenses for the year ended December 31, 1997 increased
to $12.3 million from $2 million for the year ended October 31,
1996, representing a 12% increase as a percentage of net sales
revenue (47% compared to 35%). Operating expenses for 1997 and
1996 consisted of $9.7 million and $1.3 million, respectively, of
selling, general and administrative expenses and $2.6 million and
$.7 million, respectively, of research, development and other
engineering costs.
The increase in selling, general and administrative expenses was
primarily the result of twelve months of operations in fiscal 1997
as compared to only five months included in fiscal 1996, the latter
period excluding the Parity Acquisition effective December 1, 1996.
The most significant increase in 1997 expenses resulted from
compensation and related benefits of additional employees brought
about by the Parity Acquisition.
The increase in research and development expenses was principally
the result of twelve months of operations in 1997 as compared to
only five months included in fiscal 1996, costs associated with
redesigning, standardizing and obtaining agency certification for
new product development and expenses associated with preparation
for the Company's anticipated future growth.
Operating expenses for 1998 are not expected to fluctuate
significantly. Although management anticipates increases in
certain research and development expenses which may be brought
about by the proposed Borg Acquisition (see Item 1. Recent
Development), certain other operating expenses are expected to
decrease as management focuses on improved cost efficiencies and
growth management.
Research and development costs, representing 10% and 13% of net
sales revenues in the years ended December 31, 1997 and October 31,
1996, respectively, 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.
Selling, general and administrative costs during fiscal 1997
increased to 37% of net sales revenues from 22% of net sales
revenues during 1996. 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
20
<PAGE>
legal and accounting, facilities costs allocated to those
personnel, and amortization and depreciation of certain property,
equipment and intangibles, principally goodwill. 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 increases in sales revenue.
Fiscal Years Ended October 31, 1996 and 1995
The Company reported net income of $12.8 million for the year ended
October 31, 1996 principally from the aforementioned disposition of
the Company's investment in IMNET (see Note 3 to Consolidated
Financial Statements), as compared to a net loss of $61,000 for the
year ended October 31, 1995. During fiscal 1995 and prior to the
Company's acquisition of the RAID business in June 1996, the
Company had no active operations.
Sales
Net revenues of $5.6 million for the year ended October 31, 1996
included only five months of sales revenue following the Company's
initial acquisition in June 1996.
Cost of Sales/Gross Margins
Gross margins for the year ended October 31, 1996 amounted to 37%.
The Company's gross margins are dependent, in part, on product mix
which fluctuates from time to time.
Operating Expenses
Operating expenses for the year ended October 31, 1996 approximated
$2 million and included $1.3 million in selling, general and
administrative expenses and $.7 million in research, development
and other engineering costs, and represented expenses incurred by
the Company during its initial five months of operations of the
RAID Business.
Liquidity and Capital Resources
Net cash used by operating activities amounted to $7.3 million and
$.4 million for the years ended December 31, 1997 and October 31,
1996, respectively. The most significant use of cash for fiscal
1997 was the loss from operations. Net cash used by operating
activities for the two month transition period was approximately
$.2 million.
21
<PAGE>
Net cash used by investing activities for the year ended December
31, 1997 amounted to $1.5 million, resulting from an additional
investment in property and equipment. During the two month
transition period ended December 31, 1996, the Company used $2.8
million in connection with the Parity Acquisition. During the year
ended October 31, 1996, approximately $12 million cash was provided
by investing activities from net proceeds received from the sale of
IMNET Systems, Inc. stock, partially offset by approximately $.6
million used in connection with the Company's initial acquisition
in June 1996.
Net cash provided by financing activities for fiscal 1997 consisted
of net borrowings of $4.2 million. For the two month transition
period ended December 31, 1996, net cash provided by financing
activities resulted in a net reduction in borrowings of $2.7
million, principally in connection with the Company's Parity
Acquisition.
The Company obtained an asset based revolving bank credit facility
(the "Revolver") in May 1997 (see Note 6 to Consolidated Financial
Statements). Initial terms of the Revolver allowed the Company to
borrow up to $7 million with advances limited to 75% of eligible
accounts receivable plus the lesser of (i) $1 million or (ii) 40%
of certain inventory. During 1997, the Company was not in
compliance with certain financial covenants of the Revolver;
however, under amendments to the Revolver in December 1997 and in
February 1998, the bank waived compliance and the maximum
borrowings were reduced to $3,250,000 through April 30, 1998 and $3
million thereafter, through the revised maturity date of June 30,
1998. The Revolver bears interest, payable monthly, at LIBOR plus
3%, is guaranteed by the Company and is collateralized by
substantially all assets of the Company, including approximately $1
million reflected as Restricted Cash at December 31, 1997. The
outstanding balance under the Revolver at December 31, 1997 was
$3,245,000 and there was no additional availability at that time.
In September 1997, H. Irwin Levy, a director and principal
stockholder of the Company, agreed to loan up to $1 million to the
Company (the "Director Loan"). The Director Loan was subordinated
to the Revolver and was collateralized by substantially all assets
of the Company. See Note 6 to Consolidated Financial Statements
for additional terms of the Director Loan.
In the first quarter of 1998, Mr. Levy advanced an additional net
amount of $1,050,000 (consisting of $1,460,000 advanced, less
$410,000 repaid). An Amended and Restated Loan Agreement,
dated March 5, 1998, was executed between the Company and Mr.
Levy bringing the total Director Loan to $2 million. In March
1998, three private investors each loaned the Company an additional
$1 million (together with the $2 million Director Loan, hereinafter
collectively referred to as the "Subordinated Loans").
22
<PAGE>
The Subordinated Loans are subordinated to the Revolver and
collateralized by substantially all assets of the Company and
mature September 5, 1999. See Note 6 to Consolidated Financial
Statements for additional terms of the Subordinated Loans. In
April 1998, Mr. Levy advanced an additional $735,000 which was
repaid from proceeds of a private placement of preferred stock (see
below).
In April 1998, the Company received $3.5 million in cash (including
$1 million from Mr. Levy) from a private placement of 8%
convertible preferred stock (see Note 14 to Consolidated Financial
Statements). In addition, the Company is currently negotiating
with several potential lenders to obtain an asset based revolving
credit facility ("Potential Financing"). Management believes that
proceeds already received from the Subordinated Loans and private
placement, together with the Potential Financing, if consummated,
will be sufficient to satisfy the Company's working capital needs
during 1998, as presently contemplated, including repayment of the
Revolver. There can be no assurance, however, that the Company
may not require additional capital beyond its current forecasted
needs nor that any such additional required funds would be
available on terms acceptable to the Company, if at all, at such
time or times required by the Company.
Effect of Inflation
During the last three fiscal years, inflation has not had an impact
on the Company's operations and the Company does not expect that it
will have a material impact in 1998.
Recently Issued Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS
No.130, "Reporting Comprehensive Income" and No.131, "Disclosures
about Segments of an Enterprise and Related Information". SFAS
No.130 establishes standards for reporting and displaying
comprehensive income, its components and accumulated balances.
SFAS No.131 requires the disclosure of certain information about
operating segments in the financial statements. It also requires
that public companies report certain information about their
products and services, the geographic areas in which they operate
and their major customers. The Company will adopt SFAS No.130 and
No.131 as required for all periods beginning after December 15,
1997. The adoption of these pronouncements is not expected to have
a material impact on the Company's financial statements or
disclosures.
23
<PAGE>
Other
Year 2000 issues pertain to the inability of certain computerized
information systems to properly recognize date-sensitive
information as the year 2000 approaches. Systems that do not
recognize such information could generate erroneous data or cause
systems to fail. The Company is presently reviewing the potential
impact of Year 2000 compliance issues on its information systems
and business operations, and has preliminarily determined that any
costs, problems or uncertainties associated with the potential
consequences of Year 2000 issues are not expected to have a
material impact on its future operations or financial condition.
Item 8. Financial Statements and Supplementary Data
Table of Contents to Consolidated Financial Statements
Page
Report of Independent Certified Public Accountants 25
Consolidated Financial Statements:
Balance Sheets - December 31, 1997 and 1996
and October 31, 1996 26
Statements of Operations - Year Ended
December 31, 1997, Two Months Ended
December 31, 1996, and Years Ended October
31, 1996 and 1995 27
Statements of Stockholders' Equity - Year
Ended December 31, 1997, Two Months Ended
December 31, 1996, and Years Ended October 31,
1996 and 1995 28-29
Statements of Cash Flows - Year Ended
December 31, 1997, Two Months Ended
December 31, 1996, and Years Ended
October 31, 1996 and 1995 30-31
Notes to Consolidated Financial Statements 32-46
Schedules are omitted because they are not required, or because the
information required therein is set forth in the Consolidated
Financial Statements or the notes thereto.
24
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors of
nStor Technologies, Inc.
We have audited the accompanying consolidated balance sheets of
nStor Technologies, Inc. and subsidiaries as of December 31, 1997
and 1996 and October 31, 1996, and the related consolidated
statements of operations, stockholders' equity and cash flows for
the years ended December 31, 1997, October 31, 1996 and 1995, and
the two months ended December 31, 1996. These financial statements
are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial
position of nStor Technologies, Inc. and subsidiaries as of
December 31, 1997 and 1996 and October 31, 1996 and the results of
their operations and their cash flows for the years ended December
31, 1997, October 31, 1996 and 1995 and for the two months ended
December 31, 1996, in conformity with generally accepted accounting
principles.
As discussed in the summary of significant accounting policies to
the financial statements, in 1996 the Company changed its financial
reporting period from a fiscal year ending October 31 to a calendar
year end.
BDO Seidman, LLP
Orlando, Florida
February 20, 1998 except
as to Note 6 and Note 14,
which is as of April 14, 1998
25
<PAGE>
nSTOR TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
=========================================
(dollars in thousands)
<TABLE>
<CAPTION>
December 31, October
----------------- 31,
ASSETS (Note 2 and Note 6) 1997 1996 1996
-------------------------- ------- ------- -------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents:
Restricted $ 1,024 $ - $ -
Unrestricted 61 4,619 10,608
Accounts receivable (Note 4) 3,863 4,723 1,747
Inventories (Note 4) 3,577 3,115 1,385
Prepaid expenses and other 262 129 82
------- ------- -------
Total current assets 8,787 12,586 13,822
Deferred tax asset - 182 182
Property and equipment, net of $457, $90
and $51 accumulated depreciation (Note 4) 2,060 974 694
Goodwill and other intangible
assets, net of $470, $60 and $17
accumulated amortization (Note 4) 5,915 6,325 979
------- ------- -------
$16,762 $20,067 $15,677
======= ======= =======
LIABILITIES (Note 2)
--------------------
Current liabilities:
Borrowings (Note 6) $ 3,445 $ 200 $ -
Accounts payable and other 6,568 6,326 1,977
Royalty liability 208 208 800
------- ------- -------
Total current liabilities 10,221 6,734 2,777
Long-term debt (Note 6) 554 516 510
Note payable to director (Note 6) 950 - -
------- ------- -------
Total liabilities 11,725 7,250 3,287
------- ------- -------
Commitments, contingencies and
subsequent events (Notes 6, 9, 10, and 14)
SHAREHOLDERS' EQUITY (Note 2, 6, 10 and 14)
-------------------------------------------
Preferred stock, $.01 par; shares authorized
1,000,000; outstanding none - - -
Common stock, $.05 par; shares authorized
24,000,000; outstanding 18,670,477 934 934 934
Additional paid-in capital 30,499 30,393 29,923
Deficit (26,396) (18,510) (18,467)
------- ------- -------
Total shareholders' equity 5,037 12,817 12,390
------- ------- -------
$16,762 $20,067 $15,677
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
26
<PAGE>
nSTOR TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Note 2)
=============================================
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Two
Year Months
Ended Ended Year Ended
December December October 31,
31, 31, -----------------
1997 1996 1996 1995
------- ------- ------- -------
<S> <C> <C> <C> <C>
Sales (Note 8) $26,244 $ 4,739 $ 5,619 $ -
Cost of sales 21,461 3,391 3,547 -
------- ------- ------- -------
Gross margin 4,783 1,348 2,072 -
-------- ------- ------- -------
Operating expenses:
Selling, general and
administrative 9,686 1,154 1,256 -
Research and development 2,618 299 701 -
------- ------- ------- -------
Total operating expenses 12,304 1,453 1,957 -
------- ------- ------- -------
Income (loss) from operations (7,521) (105) 115 -
Gain from sale of IMNET Systems,
Inc. stock (Note 3) - - 11,955 -
Interest income, net of investment
expenses 120 87 234 9
Interest expense (247) (25) (72) (70)
------- ------- ------- -------
Income (loss) before income taxes
and extraordinary gain (7,648) (43) 12,232 (61)
Extraordinary gain from debt
extinguishment (Note 7) - - 566 -
------- ------- ------- -------
Income (loss) before income taxes (7,648) (43) 12,798 (61)
Income tax expense (Note 5) (238) - - -
------- ------- ------- -------
Net income (loss) ($ 7,886) ($ 43) $12,798 ($ 61)
======= ======= ======= =======
Basic and diluted net income
(loss) per common share:
Income (loss) before extra-
ordinary gain ($ .42) ($ .00) $ .70 ($ .00)
Extraordinary gain - - .03 -
------- ------- ------- -------
Net income (loss) per
common share ($ .42) ($ .00) $ .73 ($ .00)
======= ======= ======= =======
Average number of common shares
outstanding 18,670,477 18,670,477 17,606,477 17,600,477
========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
27
<PAGE>
nSTOR TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(NOTES 2, 6, 10 and 14)
===============================================
(dollars in thousands)
<TABLE>
<CAPTION>
Net
Unrealized
Common Stock Addi- Gain on
---------------- tional Securities
Par Paid-in Available
Shares Value Capital For Sale Deficit Total
---------- ----- -------- --------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Balances, October
31, 1994 17,600,477 $880 $29,294 $ - ($31,204) ($1,030)
Net unrealized gain
on securities
available for sale - - - 12,023 - 12,023
Net loss for the
year ended October
31, 1995 - - - - (61) (61)
---------- ---- ------- ------- ------- -------
Balances, October
31, 1995 17,600,477 880 29,294 12,023 (31,265) 10,932
Change in net un-
realized gain on
securities avail-
able for sale - - - (12,023) - (12,023)
Issuance of common
stock in connec-
tion with:
Acquisition of
minority
interest 1,000,000 50 550 - - 600
Exercise of
warrants 60,000 3 57 - - 60
Extinguishment
of debt 10,000 1 22 - - 23
Net income for the
year ended
October 31, 1996 - - - - 12,798 12,798
---------- ----- ------- ------- ------- --------
Balances, October
31, 1996 18,670,477 934 29,923 - (18,467) 12,390
Common Stock
warrant issued in
connection with
acquisition
(Note 2) - - 470 - - 470
Net loss for the
two months ended
December 31, 1996 - - - - (43) (43)
---------- ----- ------- ------- ------- -------
Balances, December
31, 1996 18,670,477 934 30,393 - (18,510) 12,817
</TABLE>
28
<PAGE>
nSTOR TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(NOTES 2, 6, 10 and 14)
===============================================
(dollars in thousands)
(concluded)
<TABLE>
<CAPTION>
Net
Unrealized
Common Stock Addi- Gain on
---------------- tional Securities
Par Paid-in Available
Shares Value Capital For Sale Deficit Total
---------- ----- -------- --------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Common stock
options granted
to outside
directors - - 61 - - 61
Common stock
warrants issued in
connection with
borrowings (Note 6) - - 45 - - 45
Net loss for the
year ended
December 31, 1997 - - - - (7,886) (7,886)
---------- ----- ------- ------- ------- -------
Balances, December
31, 1997 18,670,477 $ 934 $30,499 $ - ($26,396) $ 5,037
========== ===== ======= ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
29
<PAGE>
nSTOR TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Note 2)
=====================================
(in thousands)
<TABLE>
<CAPTION>
Two
Year Months Year Ended
Ended Ended October 31,
December December -----------------
31, 1997 31, 1996 1996 1995
-------- -------- ------- ------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ($ 7,886) ($ 43) $12,798 ($ 61)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Gain from sale of IMNET Systems,
Inc. stock - - (11,955) -
Extraordinary gain from debt
extinguishment - - (566) -
Depreciation and amortization 777 82 68 -
Common stock options granted
to outside directors 61 - - -
Common stock warrants granted in
connection with borrowings 45 - - -
Deferred income taxes 182 - (182) -
Minority interest in net income
of consolidated subsidiary - - 26 -
Changes in assets and liabilities,
net of effects from acquisitions:
Decrease (increase) in
accounts receivable 860 (442) (1,731) (16)
Increase in inventories (462) (189) (391) -
Increase in prepaid expenses,
restricted cash and other (1,157) (23) (82) -
Increase in accounts payable
and other liabilities 242 452 1,574 66
------- ------- ------- ------
Net cash used by operating activities (7,338) (163) (441) (11)
------- ------- ------- ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net proceeds from sale of IMNET
Systems, Inc. stock - - 11,955 -
Cash paid for acquisitions - (2,800) (592) -
Additions to property and equipment (1,453) (326) (314) -
------- ------- ------- ------
Net cash (used) provided by
investing activities (1,453) (3,126) 11,049 -
------- ------- ------- ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds (repayments) of
revolving bank credit facility 3,245 (2,700) - -
Additions to other borrowings 988 - - -
Proceeds from exercise of stock
warrants - - 60 -
Cash paid for debt extinguishment - - (75) -
------- ------- ------- ------
Net cash provided (used) by
financing activities 4,233 (2,700) (15) -
------- ------- ------- ------
Net (decrease) increase in unre-
stricted cash and cash equiva-
lents during the period (4,558) (5,989) 10,593 (11)
Unrestricted cash and cash equiva-
lents at the beginning of the
period 4,619 10,608 15 26
------- ------- ------- ------
Unresticted cash and cash equiva-
lents at the end of the period $ 61 $ 4,619 $10,608 $ 15
======= ======= ======= ======
</TABLE>
30
<PAGE>
nSTOR TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Note 2)
=====================================
(in thousands)
(concluded)
<TABLE>
<CAPTION>
Two
Year Months Year Ended
Ended Ended October 31,
December December ------------------
31, 1997 31, 1996 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Cash paid during period for:
Interest $ 140 $ - $ - $ -
======= ======= ======= ======
Income taxes $ 238 $ - $ - $ -
======= ======= ======= ======
NON-CASH INVESTING ACTIVITIES:
Acquisitions:
Fair value of assets acquired - $10,073 $ 1,856 $ -
Liabilities assumed - (4,103) (664) -
Borrowings repaid at closing - (2,700) - -
Common stock issued - - (600) -
Warrant issued to seller - (470) - -
------- ------- ------- ------
Cash paid $ - $ 2,800 $ 592 $ -
======= ======= ======= ======
Royalty liability reduction $ - $ 592 $ - $ -
======= ======= ======= ======
</TABLE>
See accompanying notes to consolidated financial statements.
31
<PAGE>
nSTOR TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
==========================================
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Basis of Presentation
The consolidated financial statements include the accounts of nStor
Technologies, Inc. and all wholly-owned subsidiaries (collectively,
the "Company"). Significant intercompany balances and transactions
have been eliminated in consolidation.
Business
As a result of two acquisitions completed during the year ended
December 31, 1996 (see Note 2 to Consolidated Financial
Statements), the Company is engaged as a manufacturer and supplier
of information storage solutions, including external RAID
(Redundant Array of Independent Disks) subsystems and data storage
enclosures, UNIX-based memory products, storage management hardware
and software, digital media products, and enterprise resource
planning manufacturing solutions.
Prior to the first acquisition in June 1996, the Company's only
assets were securities issued by IMNET Systems, Inc. ("IMNET" - see
Note 3 to Consolidated Financial Statements), which the Company had
acquired in October 1992 in exchange for substantially all of the
Company's operating assets. During the time 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.
Fiscal Year
In November 1996, the Company changed its fiscal year end from
October 31 to December 31. Accordingly, the December 31, 1996
Statements of Operations, Shareholders' Equity and Cash Flows are
for the two months then ended.
Cash and Cash Equivalents
Cash and cash equivalents consist of highly liquid investment
instruments with original maturities of three months or less.
32
<PAGE>
Restricted cash
At December 31, 1997, approximately $1 million of cash was pledged
as collateral under bank borrowings (see Note 6 to Consolidated
Financial Statements), and was classified as restricted cash on the
balance sheet.
Investment Securities
Prior to the sale of IMNET securities in 1996 (see Note 3 to
Consolidated Financial Statements), the Company's investment in
IMNET was classified as available for sale and stated at fair
market value, with unrealized gains and losses excluded from
earnings and reported as a separate component of stockholders'
equity until realized.
Inventories
Inventories, consisting of raw materials, work-in-process and
finished goods, are stated at the lower of cost or market, with
cost being determined based on the first-in, first-out (FIFO)
method. Reserves are recorded as necessary to reduce obsolete
inventory to estimated net realizable value. See Note 4 to
Consolidated Financial Statements.
Revenue Recognition
Sales revenue is recognized upon shipment provided that there are
no significant post-sale obligations and the collectibility is
reasonably assured. During the periods presented in the
accompanying Consolidated Statements of Operations, there were no
significant post-sales obligations except for normal warranty
costs.
Warranty Costs
Warranty costs are provided on the basis of estimated net future
costs related to products sold.
Property and Equipment
Property and equipment are stated at cost. Depreciation is
provided under the straight-line method over the estimated useful
lives, principally five years.
33
<PAGE>
Goodwill and Other Intangible Assets
Intangible assets, substantially goodwill, are carried at cost and
amortized under the straight-line method over 15 years, the
estimated useful life. Goodwill represents the excess cost of the
acquired businesses over the fair value of net assets acquired (see
Note 2 to Consolidated Financial Statements). Management
periodically reviews goodwill to determine if an impairment has
occurred. Among various considerations, this process includes
evaluating future operating results expected from the acquired
businesses. At December 31, 1997, unamortized goodwill and other
intangible assets of $5.9 million was not considered to be
impaired.
Research and Development Costs
Research and development costs are expensed as incurred.
Income Taxes
Income taxes are provided on the liability method whereby deferred
tax assets and liabilities are recognized for the expected tax
consequences of temporary differences between the tax bases and
reported amounts of assets and liabilities.
Net Income (Loss) Per Common Share
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No.128
"Earnings Per Share", which the Company has adopted. Pursuant to
SFAS 128, the Company has replaced the reporting of "primary"
earnings per share ("EPS") with "basic" EPS. Basic EPS is
calculated by dividing the income (loss) available to common
shareholders by the weighted average number of common shares
outstanding for the period, without consideration for common stock
equivalents. "Fully diluted" EPS has been replaced with "diluted"
EPS which is determined similarly to fully diluted EPS under the
provisions of APB Opinion No.15.
For all periods presented in the Consolidated Statements of
Operations, the effect of including stock options and warrants
would have been antidilutive. Accordingly, basic and diluted EPS
for all periods presented are equivalent.
As of December 31, 1997 and 1996 and October 31, 1996 and 1995,
outstanding potentially dilutive options and warrants to purchase
the Company's Common Stock amounted to 2,320,000; 1,975,000;
1,050,000 and 105,000, respectively.
34
<PAGE>
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Financial Instruments
SFAS No.107, "Disclosures about Fair Value of Financial
Instruments", requires disclosure of fair value information about
financial instruments. Fair value estimates discussed herein are
based upon certain market assumptions and pertinent information
available to management as of December 31, 1997.
The respective carrying value of certain on-balance-sheet financial
instruments approximated their fair values. These financial
instruments include cash and cash equivalents, accounts receivable,
borrowings, accounts payable, accrued liabilities, and convertible
notes. Fair values were assumed to approximate carrying values for
these financial instruments since they are short term in nature
and their carrying amounts approximate fair values or they are
receivable or payable on demand. The fair value of the Company's
borrowings is estimated based upon quoted market prices for the
same or similar issues or on the current rates offered to the
Company for debt of the same remaining maturities. The carrying
value approximates the fair value of borrowings.
Reclassifications
Certain prior years' amounts have been reclassified to conform to
the current year's presentations. These reclassifications had no
impact on operating results previously reported.
Recently Issued Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS
No.130, "Reporting Comprehensive Income, and No.131, "Disclosures
about Segments of an Enterprise and Related Information". SFAS
No.130 establishes standards for reporting and displaying
comprehensive income, its components and accumulated balances.
SFAS No.131 requires the disclosure of certain information about
operating segments in the financial statements. It also requires
that public companies report certain information about their
35
<PAGE>
products and services, the geographic areas in which they operate
and their major customers. The Company will adopt SFAS No.130 and
SFAS No.131 as required for all periods beginning after December
15, 1997. The adoption of these pronouncements is not expected to
have a material impact on the Company's financial statements or
disclosures.
(2) ACQUISITIONS
Effective June 3, 1996, nStor Corporation, Inc., a newly-formed
subsidiary of the Company, which was 80% owned at the time (the
"Subsidiary"), 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, originally estimated
at $800,000. Based upon the conclusion of certain contingencies,
the royalty liability was reduced to approximately $208,000
effective December 31, 1996. As a result of this reduction,
property and equipment and intangible assets were likewise reduced.
Effective October 31, 1996, the Company acquired the remaining 20%
of the Subsidiary from R. Daniel Smith, president of the Subsidiary
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, the Company 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. In addition, the Company accrued
and capitalized approximately $816,000, as adjusted, in certain
transition costs expected to be incurred in connection with the
termination and relocation of the manufacturing operations from
California to Florida. A significant portion of those costs were
associated with terminating and/or relocating certain Parity
personnel. The relocation and integration of Parity operations was
completed in May 1997. 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.
Both 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 approximately $6
36
<PAGE>
million, as adjusted, and is being amortized on a straight-line
basis over 15 years. The Company also recorded approximately
$347,000, as adjusted, as intellectual assets, consisting of
trademarks and proprietary technology, which are being amortized on
a straight-line basis over 15 years. Final purchase price
allocations were made for both acquisitions during the year ended
December 31, 1997, and have been reflected in the accompanying
financial statements as of December 31, 1996. For the year ended
December 31, 1997, the two months ended December 31, 1996 and the
year ended October 31, 1996, amortization of intangible assets
approximated $410,000, $43,000 and $17,000, respectively.
(3) INVESTMENT IN IMNET SYSTEMS, INC. ("IMNET")
During 1996, a subsidiary of the Company sold all of its shares of
IMNET and received net proceeds of $11,955,000. For reporting
purposes, the Company had written off its entire investment in
IMNET in 1993, and accordingly, the Company recognized a gain of
$11,955,000 during 1996.
(4) BALANCE SHEET COMPONENTS (in thousands)
Substantially all assets are pledged as collateral for
indebtedness. See Note 6 to Consolidated Financial Statements.
December 31, October
--------------- 31,
1997 1996 1996
------ ------ -------
Accounts Receivable
Trade receivables $4,218 $5,234 $1,735
Less allowance for
doubtful accounts (500) (550) -
------ ------ ------
3,718 4,684 1,735
Other receivables 145 39 12
------ ------ ------
$3,863 $4,723 $1,747
====== ====== ======
Inventories
Raw materials $3,299 $2,575 $1,164
Work-in-process - 88 143
Finished goods 278 452 78
------ ------ ------
$3,577 $3,115 $1,385
====== ====== ======
37
<PAGE>
December 31, October
--------------- 31,
1997 1996 1996
------ ------ -------
Property and Equipment
Computer software $ 907 $ 328 $ 175
Computer equipment 809 390 284
Furniture, fixtures
and office equipment 286 215 167
Leasehold improvements 283 9 21
Other 232 122 98
------ ------ ------
2,517 1,064 745
Less accumulated depreciation (457) (90) (51)
------ ------ ------
$2,060 $ 974 $ 694
====== ====== ======
Goodwill and Other Intangible Assets
Goodwill $6,038 $6,038 $ 381
Intellectual assets 347 347 615
------ ------ ------
6,385 6,385 996
Less accumulated amortization (470) (60) (17)
------ ------ ------
$5,915 $6,325 $ 979
====== ====== ======
(5) INCOME TAXES
(a) As of December 31, 1997, there were unused net operating loss
carryforwards (the "NOL's") for regular federal income tax
purposes of approximately $8.4 million principally expiring in
2012, for which no financial statement benefit had been
recognized. In addition, the Company has research and
development tax credit carryforwards of approximately $637,000
which expire from 2002 through 2012 and in conjunction with
the Alternative Minimum Tax ("AMT") rules, the Company has
available AMT credit carryforwards of approximately $238,000,
at December 31, 1997, which may be used indefinitely to reduce
regular federal income taxes.
(b) For the year ended December 31, 1997, the provision for
federal income tax expense of $238,000 represents AMT taxes
paid during 1997.
38
<PAGE>
(c) The tax effects of temporary differences that gave rise to
significant portions of deferred tax assets follows (in
thousands):
December 31, October 31,
--------------- ---------------
1997 1996 1996 1995
------ ------ ------ ------
NOL and tax credit
carryforwards $3,728 $2,088 $2,025 $4,944
Investment in IMNET - - - 1,232
------ ------ ------ ------
3,728 2,088 2,025 6,176
Less valuation
allowance (3,728) (1,906) 1,843 (6,176)
------ ------ ------ ------
Deferred tax asset $ - $ 182 $ 182 $ -
====== ====== ====== ======
(6) BORROWINGS
The Company's short-term borrowings as of December 31, 1997
consisted of an asset based revolving bank credit facility (the
"Revolver") under which the Company may borrow up to $3.2 million,
as amended, and a $200,000 Promissory Note assumed in connection
with the Parity Acquisition.
The Revolver bears interest, payable monthly, based on LIBOR plus
3% (9% at December 31, 1997), is guaranteed by the Company and
matures on June 30, 1998, as extended. 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,
including approximately $1 million reflected as Restricted Cash at
December 31, 1997. The loan agreement provides for certain
restrictions on the payment of dividends, the incurrence of
additional indebtedness and capital expenditures, and requires
minimum working capital, tangible net worth and other financial
covenants. The Company has not consistently been in compliance
with certain financial covenants which resulted in amendments to
the Revolver in December 1997 and February 1998. Among other
modifications, the amendments waived compliance with the financial
covenants and reduced the original maximum loan amount from $7
million to $3,250,000 through April 30, 1998 and to $3 million
thereafter until maturity on June 30, 1998. The outstanding
principal balance under the Revolver at December 31, 1997 was
$3,245,000, and there was no additional availability on that date.
Long-term debt as of December 31, 1997 included borrowings under a
Promissory Note issued by a director of the Company, H. Irwin Levy
39
<PAGE>
(the "Director Loan"), under which the Company was able to borrow
up to $1 million, and convertible notes with a carrying amount of
$554,000 and $516,000 at December 31, 1997 and 1996, respectively,
(the "Convertible Notes").
Through its March 1998 maturity date, the Director Loan bore
interest, payable monthly, at prime plus one and one-half percent
(1.5%) per annum (10% at December 31, 1997), was subordinated to
the Revolver and was collateralized by substantially all assets of
the Company. In connection with the Director Loan, as of December
31, 1997, the Company issued warrants to Mr. Levy to purchase
55,000 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 January 14, 1998 through
February 13, 1998, the Company issued warrants to Mr. Levy to
purchase up to 10,000 shares under similar terms. The outstanding
balance under the Director Loan at December 31, 1997 was $950,000.
During the first quarter of 1998, Mr. Levy advanced an additional
net amount of $1,050,000 (consisting of $1,460,000 advanced, less
$410,000 repaid). An Amended and Restated Loan Agreement, dated
March 5, 1998, was executed which increased the total Director Loan
to $2 million. In March 1998, three private investors each loaned
the Company an additional $1 million (together with the $2 million
Director Loan, hereinafter collectively referred to as the
"Subordinated Loans"). In April 1998, Mr. Levy advanced an
additional $735,000 which was repaid from proceeds of a private
placement of preferred stock (see Note 14 to Consolidated Financial
Statements).
The Subordinated Loans bear interest at 10% per annum, payable
monthly, mature on September 5, 1999, are subordinated to the
Revolver and are collateralized by substantially all assets of the
Company. In connection with the Subordinated Loans, warrants were
issued to purchase an aggregate of 1,666,668 shares (including
666,666 to Mr. Levy) of common stock of the Company, exercisable on
the date of grant at $1.50 per share, expiring on March 5, 2001.
In connection with the Company's private placement of preferred
stock in April 1998, (see Note 14 to Consolidated Financial
Statements), Mr. Levy sold $1 million of participation interests in
the $2 million Director Loan to private investors, including
$250,000 to members of his family.
The Convertible Notes have a face amount of $400,000, have been
discounted based on an effective interest rate of 12%, include
accrued interest of $206,000, $198,000 and $197,000 at December 31,
1997, December 31, 1996 and October 31, 1996, respectively, mature
in 2000 and are convertible into 160,000 shares of common stock of
the Company (based on one common share for each $2.50 of face
amount).
40
<PAGE>
(7) EXTRAORDINARY GAIN ON DEBT EXTINGUISHMENT
During the year ended October 31, 1996, the Company paid $75,000 in
cash and issued 10,000 shares of its common stock in full
satisfaction of the $664,000 outstanding balance (including
accrued interest) of notes payable which had been in dispute due to
certain subordination provisions contained in the notes. As a
result of this settlement, the Company recognized a $566,000
extraordinary gain from debt extinguishment. No income tax effect
on the extraordinary gain was recorded due to the valuation
allowance for deferred tax assets.
(8) SIGNIFICANT CUSTOMERS
Two customers accounted for 10% and 11%, Intergraph Corp. and
Discreet Logic, respectively, of gross sales for 1997. One
customer, Intergraph Corp., accounted for 53% of gross sales for
the year ended October 31, 1996.
(9) LITIGATION
In June 1996, Jack Ehrenhuas, Mark Schindler, Eugene Stricker,
Amnon Damty, Ehud Mendelson and Susan Felton filed a Complaint in
the Supreme Court of the State of New York, County of Nassau,
against the Company and its Chairman, Michael Wise. The plaintiffs
claim to have contractual and proprietary interests in the prospect
of a transaction to purchase certain net assets acquired by the
Company (see Note 2 to Consolidated Financial Statements) and seek
compensatory damages plus punitive damages.
In August 1996, The Nais Corporation, Mark Schindler, Eugene
Stricker, Amnon Damty, Ehud Mendelson and Susan Felton filed a
Complaint in the same Court making similar allegations against a
subsidiary, its president R. Daniel Smith, and Intelligent
Manufacturing Systems, Inc. ("IMS"), a company for which Mr. Smith
was the Chief Executive Officer and sole shareholder. In this
action, the plaintiffs seek compensatory damages plus punitive
damages for alleged breach of contract.
Both cases are currently in discovery. Counsel for the Company
believes that the Company has good defenses to both claims and that
it will not incur any material liability. The Company is unaware
of any facts that would support any of the plaintiffs' claims and,
accordingly, the Company believes that the claims are without
merit.
From time to time, the Company is subject to legal proceedings and
other claims arising in the ordinary course of business. In the
opinion of management, the Company is not a party to any litigation
41
<PAGE>
the outcome of which would have a material adverse effect on its
business or operations.
(10) STOCK OPTIONS AND WARRANTS
The Company applies APB Opinion 25, "Accounting for Stock Issued to
Employees," and related interpretations in accounting for its
Option Plan (the "Plan"). Under APB Opinion 25, if options are
granted at exercise prices less than fair market value,
compensation expense is recorded for the excess of the fair market
value on the date of grant over the exercise price.
Under the Plan, qualified and nonqualified stock options to
purchase up to 2.5 million shares of the Company's common stock may
be granted to officers, directors, key employees and nonemployees.
The maximum term of the options granted under the Plan is ten
years.
SFAS No.123, "Accounting for Stock-Based Compensation," requires
the Company to provide pro forma information regarding net income
and earnings per share as if compensation cost for stock options
granted under the Plan, if applicable, had been determined in
accordance with the fair value based method prescribed in SFAS 123.
The Company estimates the fair value of each stock option at the
grant date by using the Black-Scholes option-pricing model with the
following weighted-average assumptions used for grants: no
dividend yield, volatility ranging from 57% to 60%, risk-free
interest rates ranging from 5.7% to 6.7% and expected lives of ten
years.
Under the accounting provisions of SFAS 123, the Company's net loss
and loss per share, for the year ended December 31, 1997 and the
two month transition period ended December 31, 1996, would have
been reduced to the pro forma amounts indicated below (in
thousands, except per share):
Year Ended Two Months Ended
December 31, 1997 December 31, 1996
----------------- -----------------
Net loss:
As reported ($7,886) ($ 43)
Pro forma ($8,123) ($672)
Loss per share:
As reported ($.42) ($.00)
Pro forma ($.43) ($.04)
For the years ended October 31, 1996 and 1995, there were no
compensation costs to be considered under SFAS 123.
42
<PAGE>
Changes in options outstanding are summarized as follows (in
thousands, except per share):
Weighted-
Average
Weighted- Fair
Average Value Per
Exercise Share of
Price Options
Shares Per Share Granted
------ --------- ---------
Year ended October 31, 1996:
Granted - equal to market
value 1,050 $2.07 $ .91
-----
Balance, October 31, 1996 1,050 2.07
Granted - equal to
market value 225 2.10 1.58
Granted - exceeds
market value 200 4.00 1.37
-----
Balance, December 31, 1996 1,475 2.53
Granted - equal to
market value 325 2.21 1.64
Forfeited - equal to
market value (35) 2.10
-----
Balance, December 31, 1997 1,765 2.48
=====
At December 31, 1997 and 1996, a total of 705,000 and 475,000,
respectively, of the outstanding options were exercisable with a
weighted-average exercise price of $2.91 and $3.20, respectively,
per share.
The following table summarizes information about fixed stock
options at December 31, 1997 (in thousands):
Weighted-
Number Average Number
Outstanding Remaining Exercisable
Exercise at Dec. 31, Contractual at Dec. 31,
Prices 1997 Life 1997
-------- ----------- ----------- -----------
$1.22 50 4 years 50
$2.06-$2.37 1,515 9 years 455
$4.00 200 9 years 200
----- ---
1,765 705
===== ===
43
<PAGE>
At December 31, 1997, the Company had outstanding warrants under
which 555,000 shares of common stock could be acquired.
Information relating to these wrrants is summrized as follows (in
thousands):
Number
of Shares
Expiration Subject to Exercise
Date Warrants Price
---------- ---------- --------
December 1999 500 $2.10
October 2000 55 $2.35
As of December 31, 1997, the Company had reserved common stock for
the following purposes (in thousands):
1996 Stock Option Plan 2,500
Stock warrants 555
Convertible notes payable 160
Non plan stock options 50
-----
3,265
=====
(11) RELATED PARTY TRANSACTIONS
Hilcoast Advisory Services, Inc. ("Advisor")
Since July 1, 1996, Advisor has provided certain financial
consulting and administrative services to the Company under an
agreement which expires on June 30, 1998, as extended, provides for
the payment of $6,000 per month, plus reimbursement for all out-of-pocket
expenses, and which may be terminated by the Company upon 60
days notice and by Advisor upon 180 days notice. H. Irwin Levy is
the Chairman of the Board, Chief Executive Officer and a majority
shareholder of the Advisor's parent. Management believes that the
terms of this agreement are no less favorable to the Company than
those that would be received from other sources.
IMS
In July 1996, the Company purchased an integrated software package
from IMS, including installation, consulting and training support,
at a cost of approximately $272,000. The software package was
purchased to facilitate the internal operations of the Company and
includes finance, planning and production, sales and marketing,
44
<PAGE>
service and engineering modules. In June 1997, the Company
acquired the assets of IMS for approximately $135,000 which was
based on the net book value of the assets acquired. Management
believes that the terms of these transactions were no less
favorable to the Company than those that would be paid to other
vendors.
(12) LEASES
The Company leases its operating facilities under operating leases
which expire at various dates through April 2002. At December 31,
1997, future minimum rental payments under operating leases that
have initial or remaining terms in excess of one year are as
follows (in thousands):
1998 $ 352
1999 339
2000 198
2001 116
2002 19
------
$1,024
======
Rent expense was $485,000 and $57,000 for the year ended December
31, 1997 and the two months ended December 31, 1996, respectively,
and $62,000 for the year ended October 31, 1996.
(13) 401(k) PLAN
The Company's 401(k) Tax Deferred Savings Plan (the "Plan") covers
substantially all employees meeting certain minimum age and service
requirements. Contributions to the plan will be determined by the
Board of Directors. No contributions have been made by the Company
to the Plan as of December 31, 1997.
(14) SUBSEQUENT EVENTS
Borg Adaptive Technologies, Inc. ("Borg")
Effective February 27, 1998, the Company signed a definitive stock
purchase agreement to acquire all the outstanding common stock of
Borg, a privately owned company headquartered in Boulder, Colorado.
The purchase price consists of $350,000 in cash, including the
retirement of $325,000 in debt, and the issuance of a warrant to
purchase 400,000 shares of the Company's Common Stock at $1.38.
The acquisition is expected to close in April 1998.
45
<PAGE>
Additional Financing/Convertible Preferred Stock
In April 1998, the Company received $3.5 million in cash (including
$1 million from Mr. Levy) from a private placement of 8%
convertible preferred stock (the "Convertible Preferred Stock"),
including $1 million deposited in escrow to be released to the
Company upon stockholder approval of an increase in the authorized
shares of the Company's Common Stock at the next Annual Meeting,
expected to be held in June 1998. The Convertible Preferred Stock
is convertible into common stock, on various dates through April
2000, at a conversion price equal to the lesser of $1.44 per share
or 77% of the market price at the date of conversion. At closing,
the Company issued warrants to purchase 280,000 shares of the
Company's Common Stock (including 80,000 to Mr. Levy), exercisable
at any time through April 2001 at an exercise price of $1.50 per
share. See also Note 6 to Consolidated Financial Statements in
connection with Subordinated Loans subsequent to December 31, 1997.
(15) FOURTH QUARTER ADJUSTMENTS
During the fourth quarter of 1997, the Company recorded an
adjustment to write-down inventory by approximately $2.9 million
resulting from a re-valuation of certain inventory acquired in the
Parity Acquisition, potential obsolete inventory and transitional
issues associated with the implementation of a new materials
requirement planning system. Management was unable to reasonably
estimate the effect, if any, of certain of these adjustments on
prior quarters in 1997 because of the implementation issues with
the materials requirement planning system. Subsequent to year end,
management has taken steps to address these implementation issues
with its cost accounting system.
46
<PAGE>
Item 9. Disagreement on Accounting and Financial Disclosure
Not Applicable
PART III
Item 10. Directors and Executive Officers of the Registrant
For information concerning this item, see the text under the
caption "Election of Directors" and "Management" in the Company's
definitive Proxy Statement (the "Proxy Statement") to be filed with
respect to the Company's 1998 Annual Meeting of Stockholders, which
information is incorporated herein by reference.
Item 11. Executive Compensation
For information concerning this item, see the text and tables under
the caption "Executive Compensation", "Report on Compensation" and
the graph under the caption "Performance Graph", in the Proxy
Statement, which information is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial
Owners and Management
For information concerning this item, see the table and text of
"Security Ownership" and "Management" in the Proxy Statement, which
information is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
For information concerning this item, see the text under the
caption "Certain Transactions" in the Proxy Statement, which
information is incorporated herein by reference.
47
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K
(a) (1) Financial Statements - See index to Consolidated
Financial Statements at page 24 of this Form 10-K.
(2) Financial statement schedules have been omitted because
they are not required, or because the information
required therein is set forth in the Consolidated
Financial Statements or the notes thereto.
(3) Exhibits - See Exhibit Index at page 49 of this Form
10-K.
(b) No reports were filed or amended by the Registrant on
Form 8-K during the fourth quarter of 1997.
48
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
3.1 Certificate of Incorporation of the Company, as amended. (1)
3.2 By-laws of the Company, as amended. (1)
4.1 Certificate of Incorporation of the Company, as amended -
see Exhibit 3.1 above. (1)
4.2 By-laws of the Company, as amended - see Exhibit 3.2 above.
(1)
10.1 Asset Purchase Agreement, dated May 23, 1996, between
Seagate Peripherals, Inc. as seller and Intelligent
Manufacturing Systems, Inc. as purchaser. (2)
10.2 Amendment No. 1 to the Asset Purchase Agreement, dated June
4, 1996, between Seagate Pheripherals, Inc. and Intelligent
Manufacturing Systems, Inc. (2)
10.3 Assignment of Asset Purchase Agreement by Intelligent
Manufacturing Systems, Inc. to nStor Corporation, Inc. (2)
10.4 Consent to Assignment of Asset Purchase Agreement by Seagate
Peripherals, Inc. (2)
10.5 Asset Purchase Agreement Between Parity Systems, Inc. and
nStor Corporation, Inc., dated November 30, 1996. (3)
10.6 Form of Warrant, dated December 30, 1996, granting Parity
Systems, Inc. the right to purchase 500,000 shares of the
Registrant's common stock. (3)
10.7 Agreement and Plan of Reorganization by and among nStor
Technologies, Inc., nStor Corporation, Inc. and R. Daniel
Smith, dated as of October 31, 1996. (1)
10.8 1996 Stock Option Plan, dated October 5, 1996. (1)
10.9 Employment Agreement between nStor Corporation, Inc. and
Norbert Witt, effective November 30, 1996. (4)
10.10 Demand Promissory Note dated May 29, 1997 between nStor
Corporation, Inc. and First Union National Bank of Florida.
(5)
49
<PAGE>
10.11 Revolving Credit and Security Agreement, dated May 29, 1997,
between nStor Corporation, Inc. and First Union National
Bank of Florida. (5)
10.12 Promissory Note from nStor Technologies, Inc. to H. Irwin
Levy dated September 16, 1997 for $1 million. (6)
10.13 Letter Agreement between H. Irwin Levy and nStor
Technologies, Inc. dated September 16, 1997 regarding note
incorporated by reference at 10.12. (6)
10.14 First Amendment to Revolving Credit and Security Agreement
dated December 15, 1997 between nStor Corporation, Inc. and
First Union National Bank.
10.15 Second Amendment to Revolving Credit and Security Agreement
dated February 27, 1998 between nStor Corporation, Inc. and
First Union National Bank.
10.16 Amended and Restated Promissory Note dated March 5, 1998
between nStor Technologies, Inc. and H. Irwin Levy for $2
million, which amends the Note referenced at 10.12.
10.17 Amended and Restated Loan Agreement dated March 5, 1998
between H. Irwin Levy and nStor Technologies, Inc., in the
amount of $2 million.
10.18 Promissory Note in the amount of $1 million dated March 5,
1998 between Fairway Partnership and nStor Technologies,
Inc. (Duplicate notes were also executed for the same amount
between nStor Technologies, Inc. and (i) Bernard A. Marden
and (ii) Herbert Gimelstob.)
10.19 Amended and Restated Security Agreement dated March 5, 1998
between H. Irwin Levy, Fairway Partnership, Herbert
Gimelstob, and Bernard A. Marden (collectively, referred to
as "Secured Parties").
10.20 Collateral Assignment of Note, Loan Agreement, Security
Agreement and Security Instruments among nStor Technologies,
Inc. and Secured Parties, dated March 5, 1998.
10.21 Letter agreement between H.Irwin Levy and Secured Parties,
dated March 6, 1998, regarding additional terms of the notes
referenced at 10.17 and 10.18.
21 Subsidiaries of the Registrant.
27 Financial Data Schedule.
50
<PAGE>
______________
(1) Incorporated by reference to Exhibits previously filed as Exhibits to
Registrant's Form 10-K dated January 27, 1997, filed January 28, 1997.
(2) Incorporated by reference to Exhibits previously filed as Exhibits to
Registrant's Form 8-K/A dated June 18, 1996, filed September 3, 1996.
(3) Incorporated by reference to Exhibits previously filed as Exhibits to
Registrant's Form 8-K dated December 30, 1996, filed January 13, 1997.
(4) Incorporated by reference to Exhibits previously filed as Exhibits to
Registrant's Form 8-K/A dated December 30, 1996, filed March 14, 1997.
(5) Incorporated by reference to Exhibits previously filed as Exhibits to
Registrant's Form 10-Q for the quarter ended June 30, 1997, filed August
14, 1997.
(6) Incorporated by reference to Exhibits previously filed as Exhibits to
Registrant's Form 10-Q for the quarter ended September 30, 1997, filed
November 13, 1997.
51
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 and 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
nSTOR TECHNOLOGIES, INC.
/s/ Mark F. Levy
April 13, 1998 By:_________________________________
Mark F. Levy, President
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates
indicated.
/s/ Mark F. Levy
April 13, 1998 ____________________________________
Mark F. Levy, President and Director
/s/ Larry Calise
April 14, 1998 ______________________________________
Larry Calise, Principal Financial
Officer and Principal Accounting Officer
/s/ H. Irwin Levy
April 13, 1998 ______________________________________
H. Irwin Levy, Director
/s/ R. Daniel Smith
April 13, 1998 _____________________________________
R. Daniel Smith, Director
/s/ Michael L. Wise
April 10, 1998 ____________________________________
Michael L. Wise, Director
/s/ Joseph D. Weingard
April 13, 1998 ______________________________________
Joseph D. Weingard, Director
/s/ Bernard Green
April 13, 1998 ____________________________________
Bernard Green, Director
/s/ Richard Reiss
April 10, 1998 ____________________________________
Richard Reiss, Director
52
<PAGE>
EXHIBIT 10.14
FIRST AMENDMENT TO REVOLVING CREDIT AND SECURITY AGREEMENT
This First Amendment to Revolving Credit and Security Agreement (the
"Amendment") is entered into as of the 15th day of December, 1997, by and
between nSTOR CORPORATION, INC., a Delaware corporation (the
"Borrower"), and First Union National Bank, as successor by merger to First
Union National Bank of Florida, a national banking corporation (the "Bank").
W I T N E S E T H:
WHEREAS, Borrower and Bank entered into that certain Revolving Credit and
Security Agreement dated May 29,1997 (the "Agreement"); and
WHEREAS, Borrower and Bank desire to modify certain of the terms and
provisions of the Agreement.
NOW THEREFORE, for good and valuable considerations, the receipt of which
is hereby acknowledged, Borrower and Bank hereby modify the Agreement as
follows:
1. Loan Maturity Date: The term "Loan Maturity Date" as defined in Section
1.1 is hereby modified to read as follows:
"Loan Maturity Date" shall mean February 27, 1998, or such earlier date as
the Bank shall demand payment.
2. Maximum Loan Amount: The term "Maximum Loan Amount" as defined
in Section 1.1 of the Agreement is hereby modified to read as follows:
"Maximum Loan Amount" shall mean Three Million Two Hundred Fifty
Thousand Dollars ($3,250,000.00) or such other amount as the Bank may consent
to in writing from time to time.
3. Financial Covenants. The Bank does hereby waive any non-compliance by
Borrower as of the quarter ending September 30, 1997, and continuing until the
Loan Maturity Date, with the financial covenants set forth in Sections 5.26(c)
and 5.26(e) of Exhibit 5.26.
4. Reaffirmation. Except as hereby modified, the Agreement is reaffirmed
in its entirety.
<PAGE>
BORROWER:
nSTOR CORPORATION, INC.
/s/ Michael Wise
BY:___________________________________________
Michael Wise
BANK:
FIRST UNION NATIONAL BANK
/s/ Gary Walker
BY:___________________________________________
Gary Walker - Vice President
New York
STATE OF ______________)
Nassau )
COUNTY OF ______________)
The foregoing instrument was acknowledged before me this 8th day of
December 1997, by_______________________, as ______________________ of
nSTOR CORPORATION, INC., a Delaware corporation, who [ ] is personally
known to me or [x] who has produced New York State Drivers License as
identification.
/s/ Roberta Caponi
_________________________________
(Signature of person taking acknowledgment)
____________________________________
(name of officer taking acknowledgment)
Seal:
STATE OF FLORIDA _________)
)
COUNTY OF DADE ___________)
<PAGE>
The foregoing instrument was acknowledged before me this ____ day of
December 1997, by Gary Walker, as Vice President of First Union National
Bank, a national banking corporation, who [ ] is personally known to me or
[ ] who has produced ______________________________ as identification.
/s/ Elisa Acosta
____________________________________
(Signature of person taking acknowledgment)
____________________________________
(name of officer taking acknowledgment)
Seal:
<PAGE>
EXHIBIT 10.15
SECOND AMENDMENT TO REVOLVING CREDIT AND SECURITY
AGREEMENT
This Second Amendment to Revolving Credit and Security Agreement (the
"Amendment") is entered into as of the 27th day of February, 1998, by and
between nSTOR CORPORATION, INC., a Delaware corporation (the
"Borrower"), and First Union National Bank, as successor by merger to First
Union National Bank of Florida, a national banking corporation (the "Bank").
W I T N E S E T H:
WHEREAS, Borrower and Bank entered into that certain Revolving Credit
and Security Agreement dated May 29,1997 as amended on December 15, 1997
(as amended, the "Agreement"); and
WHEREAS, The Loan Maturity Date was February 27, 1998; and
WHEREAS, Borrower has requested Bank to extend the Loan Maturity Date
to June 30, 1998; and
WHEREAS, Bank is willing to extend the Loan Maturity Date to June 30,
1998, subject to and conditioned upon the terms and conditions of this
Amendment.
NOW THEREFORE, for good and valuable considerations, the receipt of
which is hereby acknowledged, Borrower and Bank hereby modify the
Agreement as follows:
1. Loan Maturity Date: The term "Loan Maturity Date" as defined in Section
1.1 of the Agreement is hereby modified to read as follows:
"Loan Maturity Date" shall mean June 30, 1998, or such earlier date as
the Bank shall demand payment.
2. Maximum Loan Amount: The term "Maximum Loan Amount" as defined
in Section 1.1 of the Agreement is hereby modified to read as follows:
(a) "Maximum Loan Amount" shall mean until April 30, 1998, the amount
of Three Million Two Hundred Fifty Thousand Dollars ($3,250,000.00) or such
other amount as the Bank may consent to in writing from time to time.
<PAGE>
(b) Commencing on April 30, 1998 and continuing thereafter until the
Loan Maturity Date, the "Maximum Loan Amount" shall be Three Million
Dollars ($3,000,000.00), or such other amount as the Bank may consent to in
writing from time to time, subject to the provisions of subsection 3
hereinbelow.
3. Additional Collateral in Lieu of Decrease in Maximum Loan Amount.
The Borrower shall have the right and option to deliver and pledge to the Bank
a Certificate of Deposit or a Money Market Pledge in the principal amount of
Two Hundred Fifty Thousand Dollars ($250,000.00) on or before April 30, 1998
as additional collateral for the Revolving Loan. The Certificate of Deposit or
Money Market Pledge shall be issued by Bank upon receipt of $250,000.00
from Borrower (and/or from Guarantor, nSTOR TECHNOLOGIES, INC.)
designated for use as a Certificate of Deposit or a Money Market Pledge, and
shall mature not earlier than July 1, 1998, and shall be held by Bank. If
Borrower (and/or Guarantor) does deliver and pledge the Certificate of Deposit
or Money Market Pledge with Bank on or before April 30, 1998, then
notwithstanding the provisions of subsection 2(b) above, the Maximum Loan
Amount between April 30, 1998 and the Loan Maturity Date shall be Three
Million Two Hundred Fifty Thousand Dollars ($3,250,000.00).
4. Subordination. Borrower agrees that all loans to Borrower from any
person or entity other than the Bank (excepting only the Permitted Debit as
defined in the Agreement) shall be fully subordinate to the Revolving Loan
held by Bank. Borrower agrees that except for nSTOR TECHNOLOGIES,
INC., which previously executed a Continuing Subordination Agreement, it
shall obtain the execution by each creditor of Borrower of a Subordination
Agreement in the form attached hereto as Exhibit A and shall deliver it to
Bank prior to accepting any loans from any creditor. Borrower further
acknowledges and agrees that it will not pay any principal to any creditor,
except the Permitted Debt described in the Agreement, until the Revolving
Note is paid in full and the Agreement terminated.
5. Waiver of Claims. As a material inducement for Bank to execute this
Amendment, Borrower does hereby waive and release, acquit, satisfy and
forever discharge Bank and its affiliates and assignees from any and all claims,
counterclaims, defenses, actions, causes of action, suits, controversies,
agreements, promises and demands whatsoever in law or in equity which
Borrower hereafter can, shall or may have against Bank, its affiliates or
assignees, for, upon or by reason of any matter, cause or thing whatsoever
through the date hereof arising out of or in connection with the Revolving
Loan. In addition, and without limiting the generality of the foregoing, and in
consideration of the Bank's execution of this Amendment, Borrower covenants
<PAGE>
with and warrants unto Bank, and its affiliates and assignees, that there exist
no claims, counterclaims, defenses, objections, offsets or claims of offsets
against Bank or against the obligation of the Borrower to pay the indebtedness
evidenced by the Revolving Note to Bank when and as the same become due
and payable.
6. Financial Covenants. The Bank does hereby waive any non-compliance by
Borrower as of the quarter ending March 31, 1998, and continuing until the
Loan Maturity Date, with the financial covenants set forth in Sections 5.26(c)
and 5.26(e) of Exhibit 5.26.
7. Reaffirmation. Except as hereby modified, the Agreement is reaffirmed
in its entirety.
BORROWER:
nSTOR CORPORATION, INC.
/s/ Michael L. Wise
By:________________________________
BANK:
FIRST UNION NATIONAL BANK
/s/ Gary Walker
By:________________________________
Vice President
New York
STATE OF _________________________)
Nassau )
COUNTY OF__________________________)
The foregoing instrument was acknowledged before me this 12th day of March
1998, by Michael L. Wise, as Vice President of nSTOR CORPORATION,
INC., a Delaware corporation, who [ ] is personally known to me or [x] who has
produced New York State Drivers License as identification.
<PAGE>
/s/ Roberta Caponi
____________________________________
(Signature of person taking acknowledgment)
____________________________________
(name of officer taking acknowledgment)
Seal:
STATE OF FLORIDA)
)
COUNTY OF DADE )
The foregoing instrument was acknowledged before me this 9th day of March
1998, by Gary Walker, as Vice President of First Union National Bank, a
national banking corporation, who [x] is personally known to me or [ ] who has
produced ______________________________ as identification.
/s/ Elisa Acosta
____________________________________
(Signature of person taking acknowledgment)
____________________________________
(name of officer taking acknowledgment)
Seal:
<PAGE>
EXHIBIT A
SUBORDINATION AGREEMENT
_________________, 1998
TO: First Union National Bank
4299 N.W. 36th Street
Miami Springs, FL 33166
The undersigned, as a creditor of nSTOR CORPORATION, INC., a Delaware
corporation, (hereinafter referred to as Borrower), know that Borrower
desires to obtain credit accommodation from you and that you are willing
to extend credit accommodation to Borrower from time to time, when and in
such amounts as you deem advisable, provided this Subordination Agreement
shall be and remain in full force and effect. To induce you to give such
credit accommodation to Borrower, I agree that:
1.) Any indebtedness now existing or hereafter contracted for and owing
by Borrower to you, notice of the creation, existence, extension and
renewal of which indebtedness being hereby waived by me, shall be paid in
full (including all expenses and costs pertaining thereto), prior to
payment of any part of any principal of all indebtedness now existing or
hereinafter contracted and owing by Borrower to me, and that I shall
receive no additional security from Borrower for such indebtedness to me,
nor assert any right, to which I may have or become entitled against the
Borrower or any of its properties, so long as Borrower shall be indebted
to you, without your prior written consent.
2.) No interest under any such note(s), security instrument(s) or other
instrument evidencing the Borrower's indebtedness to me, has been
previously assigned, pledged or transferred by me, in whole or in part, in
any manner whatsoever.
3.) All such indebtedness of Borrower to me, now existing or hereafter
contracted, is hereby assigned to you as security for the payment of all
such indebtedness of Borrower to you and nothing in this agreement shall
by implication diminish the effect of the assignment contained in this
paragraph.
4.) In any proceeding to wind up the affairs of Borrower, whether in
bankruptcy or otherwise, or for an arrangement with creditors, or for
reorganization of Borrower, you shall have the right to prove and vote my
claim and to receive all distributions thereon.
5.) Any such notes or other evidence of indebtedness which have been or
shall be issued to me by Borrower shall be endorsed with a memo reading:
"Payment of the instrument is subordinated to all debts now or hereafter
owed by maker to First Union National Bank."
<PAGE>
6.) Upon any breach of this agreement by me or Borrower, all
indebtedness then owing by Borrower to you shall, at your option, become
due and payable at once. Any funds or property of any kind received by me
in violation of this agreement shall be held by me in trust for you and
shall be immediately forwarded, paid or delivered over to you properly
endorsed or transferred to your order. Your waiver of earlier breaches
hereunder shall not be construed as waiver of any later breach. This
agreement shall remain in full force and effect until released in writing
by you, and any such termination shall in no manner impair or affect my
liability then existing to you hereunder, or the priority of any claim
held by you against the Borrower at the time of such termination.
7.) Notwithstanding anything to the contrary contained herein, this
subordination agreement shall not apply to payments of accrued interest
only to the undersigned creditor provided that Borrower is not in default
under any loan from you.
Borrower joins in the foregoing agreement which shall be binding upon all
parties hereto and their respective heirs, assigns, successors, executors
and administrators.
CREDITOR
nSTOR CORPORATION, INC.
_________________________ By:_____________________________
Address of Creditor:
__________________
__________________
__________________
<PAGE>
EXHIBIT 10.16
AMENDED AND RESTATED PROMISSORY NOTE
U.S. $2,000,000.00 March 5, 1998
FOR VALUE RECEIVED, the undersigned nSTOR TECHNOLOGIES, INC., a
Delaware corporation with its principal place of business at 100 Century
Boulevard, West Palm Beach, Florida 33417; FAX:(561)640-3160 (hereinafter
called "Maker") hereby promises to pay to the order of H. Irwin Levy, an
individual resident of the State of Florida, with a business address at
100 Century Boulevard, West Palm Beach, Florida 33417; Fax:(561)640-3160,
(hereinafter called "Payee") at the address of Payee's principal place of
business stated above, or at such other place as the Payee may designate
in writing, the sum of TWO MILLION and 00/100ths U.S. Dollars (U.S.
$2,000,000.00) (the "Principal Amount"), plus interest on the outstanding
balance of the Principal Amount at the rate of ten percent (10%) per
annum, payable monthly, from the date hereof until the date when said sum
is paid in full in accordance with the terms hereof. The entire Principal
Amount plus all accrued interest thereon shall be due and payable in full
on September 5, 1999.
This note evidences an obligation under, and pursuant to the terms
of, an Amended and Restated Loan Agreement, dated of even date herewith
(the "Loan Agreement"), between Payee and Maker. This note is secured by
that certain Amended and Restated Security Agreement, dated of even date
herewith (the "Security Agreement"), between Maker and Payee and certain
other parties.
Each of the following shall constitute an event of default ("Event of
Default") hereunder: (i) failure by Maker to pay the Principal Amount plus
all accrued interest thereon in full on or before the date when due
hereunder, (ii) occurrence of an "Event of Default" under the Loan
Agreement (an "Event of Default" as defined therein), or (iii) occurrence
of an "Event of Default" under the Security Agreement (an "Event of
Default" as defined therein).
Upon the occurrence of an Event of Default hereunder, the entire
unpaid amount of this note shall thereupon be immediately due and payable,
and the Payee shall have all rights and remedies provided under this note,
the Loan Agreement, the Security Agreement, and applicable law.
Maker shall have the right, in Maker's discretion at any time,
without payment of premium or penalty, or prepay in whole or in part the
unpaid balance of this note.
Payment of this Note is subject to all of the terms and conditions of
the Loan Agreement.
<PAGE>
This note shall be governed by and construed under the laws of the
State of Florida. The exclusive venue for any litigation in connection
with or arising out of this note shall be Palm Beach County, Florida, and
the Maker hereby consents and submits to the jurisdiction of the state and
federal courts sitting in Palm Beach County, Florida.
MAKER HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES THE
RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED
HEREON, OR ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS NOTE.
nSTOR TECHNOLOGIES, INC.
/s/ Mark F. Levy
By: __________________________________
Mark F. Levy
Name: ________________________________
President
Title: _______________________________
<PAGE>
EXHIBIT 10.17
AMENDED AND RESTATED LOAN AGREEMENT
This Amended and Restated Loan Agreement (the "Agreement") is made as of
the 5th day of March, 1998 by and between nSTOR TECHNOLOGIES, INC. a
Delaware corporation, with its principal place of business at 100 Century
Boulevard, West Palm Beach, Florida 33417; Fax: (561) 640-3160 (the
"Borrower") and H. Irwin Levy, an individual resident of the State of
Florida, with a business address at 100 Century Boulevard, West Palm
Beach, Florida 33417; Fax: (561) 640-3160 (the "Lender").
Lender has lent Borrower an aggregate of $2,100,000 since September 16,
1997 (the "Loan"). The Loan is evidenced by a promissory note in the
principal amount of $1,000,000 dated September 16, 1997, a promissory note
in the principal amount of $600,000 dated February 17, 1998 (collectively,
the "Prior Notes") and a convertible subordinated debenture in the
principal amount of $500,000 (the "Debenture"). In connection with the
issuance of the Notes, Borrower and Lender entered into loan agreements
dated September 16, 1997 and February 17, 1997, respectively (the "Loan
Agreements"). In consideration of the cancellation and surrender of the
Notes and the Debenture by Lender, Lender and Borrower desire to amend and
restate the Loan Agreements in accordance with the terms and conditions
set forth herein:
A. Loan and Note.
1. Subject to the terms and conditions of this Agreement, Lender agrees
to lend to Borrower, the principal amount of TWO MILLION and no/100 United
States Dollars ($2,000,000.00), as may be amended, renewed, increased,
restated, replaced, or otherwise modified from time to time (the "Amended
Loan"). The Amended Loan shall be evidenced by an amended and restated
promissory note of Borrower payable to order of Lender of even date
herewith, in the form attached hereto and incorporated herein as Exhibit
"A", as may be amended, renewed, increased, restated, replaced, or
otherwise modified from time to time (the "Note"), and shall bear interest
at the rate and be subject to such repayment and other terms as set forth
therein and herein.
2. The proceeds of the Amended Loan are to be used by the Borrower
solely as working capital in the ordinary course of Borrower's business.
3. Upon execution hereof, Lender shall surrender the Prior Notes and
the Debenture to Borrower for cancellation and Borrower shall pay Lender
<PAGE>
$100,000 in cash plus all accrued and unpaid interest as of the date
hereof under the Prior Notes and the Debenture.
B. Collateral Security. The Borrower's obligations under this
Agreement and the Note shall be secured by a security interest (the
"Security Interest") in all assets of the Borrower pursuant to an amended
and restated security agreement of even date herewith, in the form
attached hereto as Exhibit B (the "Security Agreement"). The security
interest granted to Lender pursuant to the Security Agreement shall be (i)
subordinated to (A) the security interest in favor of First Union National
Bank N.A. (the "First Union Security Interest") as evidenced by the loan
or credit agreement in effect between First Union National Bank N.A. and
the nStor Corporation, Inc. ("NCI") as of the date hereof and the UCC-1
Financing Statement relating thereto filed of record with the Secretary of
State of the State of Florida as of the date hereof, (B) a security
interest in all assets of the Borrower and NCI to be given hereafter in
favor of Congress Financial Corporation (Florida), or a similar lender,
bank or financial institution (the "Congress Security Interest"), to
secure a revolving line of credit to NCI, and (C) the security interests
granted under other "Senior Indebtedness" (as hereinafter defined) (the
"Senior Indebtedness Security Interest") (the First Union Security
Interest, the Congress Security Interest and the Senior Indebtedness
Security Interest are collectively referred to hereinafter as the
"Permitted Liens"); and (ii) pari passu with (A) all security interests
granted or granted hereafter to H. Irwin Levy, and (B) the security
interests granted to other lenders as of the date hereof (the "Pari Passu
Liens"). The Borrower shall execute and deliver and cause to be executed
and delivered such further instruments and documents, including without
limitation UCC-1 Financing Statements, as shall be reasonably necessary
and proper to effectuate the granting and perfection of the Security
Interest. The Lender shall execute and deliver such further instruments
and documents as shall be reasonably necessary and proper to reflect the
subordination of the Security Interest to the Permitted Liens. For
purposes of this Agreement, Senior Indebtedness shall mean all
indebtedness, obligations and liabilities of Borrower to banks and other
financial institutions now existing or hereafter arising.
C. Loan Documents. This Agreement, the Note, the Security Agreement,
as the same may be amended, renewed, increased, restated, replaced, or
otherwise modified from time to time, together with such financing
statements, subordination agreements, and other instruments and documents
as shall be delivered in connection therewith shall be referred to
collectively herein as the "Loan Documents".
D. Warrants.
1. As additional consideration for the Amended Loan, the Borrower
hereby agrees to issue to Lender warrants to purchase 666,666 shares of
the Borrower's common stock (the "Warrants"), par value $0.05 per share
(the "Common Stock"). The Warrants shall have a term of three (3) years
and the exercise price of the Warrants shall be $1.50 per share of Common
Stock.
2. Upon execution hereof, Lender shall surrender the warrant to
purchase 53,334 shares of Common Stock dated February 17, 1998 (the "Prior
Warrant") to Borrower for cancellation.
<PAGE>
E. Covenants of Borrower
Borrower hereby covenants and agrees with Lender as follows:
1. To duly and punctually perform, observe and comply with all of
the terms, provisions, conditions, covenants and agreements on its part to
be performed, observed and complied with hereunder and under the Loan
Documents. Borrower will not suffer or permit any Event of Default (as
hereinafter defined) to exist hereunder or thereunder. Borrower will
promptly give notice in writing to Lender of the occurrence of any event
or circumstance materially affecting in an adverse manner Borrower's
ability to repay the Amended Loan.
2. The Borrower shall not use the proceeds of the Amended Loan for
any purpose other than the permitted purposes set forth in Section A(2) of
this Agreement.
F. Representations and Warranties of Borrower. As a condition to and
as an inducement to the Lender to make the Amended Loan hereunder,
Borrower hereby represents, warrants and certifies to the Lender that as
of the date hereof, for so long as any portion of the Amended Loan, or any
accrued interest thereon, is outstanding and not paid to Lender in full
and for so long as any of Borrower's obligations under any of the Loan
Documents have not been satisfied, each of the following statements is and
will remain true and correct in all respects:
1. The execution and delivery of the Loan Documents, and the
performance by the Borrower of its obligations thereunder, will not be in
conflict with, or constitute (with or without the passage of time or
giving of notice) a breach or default under, or require any consent or
waiver (other than any consents or waivers that have been obtained), or
result in the creation of any mortgage, pledge, lien, encumbrance or
charge upon the assets of the Borrower under (i) any provision of the
articles of incorporation or bylaws of the Borrower as in effect on the
date hereof, (ii) any instrument, mortgage, deed of trust, contract or
agreement to which the Borrower is a party or by which it is bound, or
(iii) any judgment, decree or order of a court, tribunal or governmental
authority by which the Borrower is bound.
2. Each of the Loan Documents to which Borrower is a party has
been duly authorized and validly executed by the Borrower pursuant to all
requisite corporate action of the Borrower, and is and will remain the
duly valid and binding obligation of the Borrower, enforceable against the
Borrower in accordance with its terms.
3. Neither the Borrower nor any of its properties or assets are
bound by, subject to or affected by any note, indebtedness, bond,
mortgage, lien, indenture, deed of trust, or other similar instrument or
obligation other than: (i) those established pursuant to the Loan
Documents, (ii) those underlying or those which may hereafter be
established as and underlying the Permitted Liens or the Pari Passu Liens,
and (iii) debt incurred in the ordinary course of business of the
Borrower.
4. Neither the Borrower nor any of its properties or assets are
subject to any order, writ, injunction, directive or decrees or statute,
rule or regulation not applicable to Florida corporations generally.
5. No authorizations, approvals, consents of, and no filings or
registrations with, any governmental or regulatory authority or agency are
necessary for the execution, delivery or performance by the Borrower of
<PAGE>
any of the Loan Documents to which it is a party or for the validity or
enforceability thereof, except for the filings and recordings of UCC-1
Financing Statements pursuant to the Loan Documents.
6. Except as set forth on Schedule A attached hereto, there are no
actions, suits, proceedings or investigations pending or threatened,
including without limitation, actions, suits or proceedings relating to
product or service liability claims, against or affecting the Borrower or
any of its properties or business, at law or in equity, or before or by
any federal, state, municipal or other governmental department,
commission, board, bureau, agency or instrumentality, domestic or foreign,
whether as plaintiff or defendant, which individually or in the aggregate
could have a material adverse effect on the properties, operations or
financial condition of the Borrower. There is no state of facts or
contemplated event which may reasonably be expected to give rise to such
claim, action, suit, proceeding or investigation which could have a
material adverse effect on the properties, operations or financial
condition of the Borrower. The Borrower is not operating under, or
subject to, or in default with respect to, any judgment, order, writ,
injunction, rule, regulation or decree of any court or federal, state,
municipal or other governmental agency or body, domestic or foreign.
7. The Borrower is not in violation of, or default under (i) any
instrument, mortgage, deed of trust, contract or agreement to which it is
a party or by which it is bound, or (ii) any provision of the articles of
incorporation or bylaws of the Borrower.
8. There are no liens, mortgages, encumbrances, security interests
or rights of third parties with respect to the Collateral (as defined in
the Security Agreement) other than as permitted under the Loan Documents.
9. As of the date hereof, after taking into account the
transactions contemplated by the Loan Documents, the fair value of the
Borrower or any and all property (tangible and intangible) of the Borrower
is greater than the total amount of liabilities, including any contingent
liabilities, of the Borrower.
10. As of the date hereof, after taking into account the
transactions contemplated by the Loan Documents, the present fair salable
value of the Borrower or of the assets (tangible or intangible) of the
Borrower is not less than the amount that will be required to pay the
probable liabilities of the Borrower on its existing debts as the debts
become absolute and matured.
11. As of the date hereof, after taking into account the
transactions contemplated by the Loan Documents, the Borrower is able to
realize upon its assets (tangible and intangible) and pay its debts and
other liabilities, contingent obligations and other commitments as they
mature in the normal course of business.
12. The Borrower owns, holds or licenses all material patents,
trademarks, franchises, licenses, permits, rights-of-way and consents as
are required or necessary to own its material properties and assets and to
conduct its businesses as presently conducted.
13. As of the date hereof, after taking into account the
transactions contemplated by the Loan Documents, the Borrower does not
have an unreasonably small capital, taking into consideration, among other
things, the following:
(a) The cash and other current assets of the Borrower;
<PAGE>
(b) The experience of the management in operating the business and
in acquiring and disposing of assets;
(c) Contingent liabilities of the Borrower;
(d) The amortization requirements of all long-term debt and the
anticipated interest payable on all debt; and
(e) Customary terms of trade payables in the business in which the
Borrower is engaged.
G. Events of Default. The following events shall constitute "Events of
Default" hereunder:
1. Borrower fails to pay any principal, interest, or other amount
due on any indebtedness owed Lender under the Loan Documents within ten
(10) days after any such amount becomes due in accordance with the terms
thereof or hereof;
2. There occurs an "Event of Default" under the Security Agreement
or under the Note (as "Event of Default" is defined in those documents
respectively) or Borrower fails to fully and promptly perform any
agreement, term, covenant, or condition of this Agreement, the Note or the
Security Agreement;
3. There occurs an event of default under any other instrument,
agreement or document evidencing indebtedness from the Borrower to any
other person or entity;
4. Borrower liquidates or dissolves, Borrower commences, or
consents to or acquiesces in, a voluntary proceeding in bankruptcy or
insolvency; Borrower applies for, or consents or acquiesces in, the
appointment of a receiver for all or a substantial part of its property;
Borrower makes an assignment for the benefit of creditors; or Borrower is
unable to pay its debts as they mature or admits in writing its inability
to pay it debts as they mature;
5. An involuntary proceeding in bankruptcy or insolvency is
commenced against Borrower; a receiver is involuntarily appointed for all
or a substantial part of the property of Borrower; or an order is entered
for the issuance of a warrant of attachment, execution, distraint, or
similar process against all or a substantial part of the property of
Borrower; and
6. Any breach of a representation, warranty or covenant made by
Buyer hereunder or if any representation or warranty made by Buyer
hereunder is untrue.
H. Remedies of Lender. Borrower agrees that the occurrence of such
Event of Default shall constitute a default under each of the Loan
Documents, and, other than as provided in Section F.1 hereof, in the event
such Event of Default shall continue unremedied for a period of thirty
(30) days after the earlier to occur of (i) an officer of Borrower becomes
aware of such default or (ii) notice of such default to the Borrower by
the Lender, Lender shall be entitled to: (1) accelerate and declare
immediately due and payable all indebtedness evidenced by this Agreement
and the Note; (2) exercise any and all of the various remedies therein
provided herein, in the Note, in the Security Agreement and in any other
of the Loan Documents; and (3) cumulatively exercise all other rights,
options and privileges, and remedies provided by law or in equity.
<PAGE>
I. Notices. All notices, requests and other communications to either
party hereunder shall be in writing and shall be given to such party at
its address or telefax number set forth at the beginning of this Agreement
or such other address or telefax number of which such party may hereafter
give notice to the other. Each such notice, request or other
communication shall be effective (i) if given by telefax, upon
transmission with a machine-generated transmittal confirmation, (ii) if
given by mail, 72 hours after such communication is deposited in the
United States mails with first class postage prepaid, addressed as
aforesaid, or (iii) if given by any other means, when delivered at the
address specified in this Section.
J. Miscellaneous
1. Whenever in this Agreement one of the parties hereto is named or
referred to, the heirs, legal representatives, permitted successors and
permitted assigns of such party shall be included, and all covenants and
agreements contained in this Agreement by or on behalf of Borrower or by
or on behalf of Lender shall bind and inure to the benefit of their
respective heirs, legal representatives, permitted successors and
permitted assigns, whether so expressed or not.
2. The headings of the sections, paragraphs and subdivisions of
this Agreement are for the convenience of reference only, are not to be
considered a part hereof and shall not limit or otherwise affect any of
the terms hereof.
3. Neither this Agreement nor any provision hereof may be changed,
waived, discharged or terminated orally, but only by written instrument
signed by the party against whom enforcement of the change, waiver,
discharge or termination is sought.
4. This Agreement shall be governed in its enforcement,
construction and interpretation by the laws of the State of Florida,
without reference to principles of conflict of laws.
5. In the event any legal proceedings are instituted between the
parties concerning this Agreement or the Note, the prevailing party shall
be entitled to recover its costs of suit, including reasonable attorneys'
fees, at both trial and appellate levels from the losing party.
6. BORROWER HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES
THE RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION
BASED HEREON, OR ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS
AGREEMENT, THE NOTE, OR ANY OF THE OTHER LOAN DOCUMENTS, OR ANY COURSE OF
CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR
ACTIONS OF EITHER PARTY. THIS PROVISION IS A MATERIAL INDUCEMENT FOR THE
LENDER TO ENTER INTO THE LOAN.
7. This Agreement may not be amended or modified except by a
writing signed by both parties hereto.
8. The exclusive venue for any litigation in connection with or
arising out of this Agreement or the Note shall be Palm Beach County,
Florida.
9. This Agreement, the Note, the Security Agreement and the other
Loan Documents shall constitute the entire agreement and understanding of
the parties hereto with respect to the subject matter hereof, and there
are no other agreements or understandings, oral or written, that are not
merged herein or superseded hereby.
<PAGE>
10. This Agreement may be executed in one or more counterparts, each
of which shall be deemed an original, but all of which taken together
shall constitute one and the same instrument.
IN WITNESS WHEREOF, Borrower and Lender have executed this Agreement as of
the date first set forth above.
BORROWER
nSTOR TECHNOLOGIES, INC.
/s/ Mark F. Levy
By:_____________________________
Name: Mark F. Levy
Title: President
LENDER
/s/ H. Irwin Levy
_______________________________
H. Irwin Levy
<PAGE>
EXHIBIT 10.18
PROMISSORY NOTE
U.S. $1,000,000.00 March 5, 1998
FOR VALUE RECEIVED, the undersigned nSTOR TECHNOLOGIES, INC., a Delaware
corporation with its principal place of business at 100 Century Boulevard,
West Palm Beach, Florida 33417; Fax: (561) 640-3160 (hereinafter called
"Maker") hereby promises to pay to the order of Fairway Partnership, a
Minnesota general partnership ("Fairway"), with a business address at 5217
Wayzata Boulevard, Suite 212, Minneapolis, Minnesota 44316; Phone: (612)
546-6400, Fax: (612) 546-1928 (hereinafter called "Payee") at the address
of Payee's principal place of business stated above, or at such other
place as the Payee may designate in writing, the sum of ONE MILLION and
00/100ths U.S. Dollars (U.S. $1,000,000.00) (the "Principal Amount"), plus
interest on the outstanding balance of the Principal Amount at the rate of
ten percent (10%) per annum, payable monthly, from the date hereof until
the date when said sum is paid in full in accordance with the terms
hereof. The entire Principal Amount plus all accrued interest thereon
shall be due and payable in full on September 5, 1999.
This note evidences an obligation under, and pursuant to the terms of, a
Loan Agreement, dated of even date herewith (the "Loan Agreement"),
between Payee and Maker. This note is secured by that certain Amended and
Restated Security Agreement, dated of even date herewith (the "Security
Agreement") between Maker, Payee and certain other parties.
Each of the following shall constitute an event of default ("Event of
Default") hereunder: (i) failure by Maker to pay the Principal Amount plus
all accrued interest thereon in full on or before the date when due
hereunder, (ii) occurrence of an "Event of Default" under the Loan
Agreement (an "Event of Default" as defined therein), or (iii) occurrence
of an "Event of Default" under the Security Agreement (an "Event of
Default" as defined therein).
Upon the occurrence of an Event of Default hereunder, the entire unpaid
amount of this note shall thereupon be immediately due and payable, and
the Payee shall have all rights and remedies provided under this note, the
Loan Agreement, the Security Agreement, and applicable law.
Maker shall have the right, in Maker's discretion at any time, without
payment of premium or penalty, to prepay in whole or in part the unpaid
balance of this note.
<PAGE>
Payment of this Note is subject to all of the terms and conditions of the
Loan Agreement.
This note shall be governed by and construed under the laws of the State
of Florida. The exclusive venue for any litigation in connection with or
arising out of this note shall be Palm Beach County, Florida, and the
Maker hereby consents and submits to the jurisdiction of the state and
federal courts sitting in Palm Beach County, Florida.
MAKER HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES THE RIGHT IT
MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON, OR
ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS NOTE.
nSTOR TECHNOLOGIES, INC.
/s/ Mark F. Levy
By:____________________________
Mark F. Levy, President
<PAGE>
EXHIBIT 10.19
AMENDED AND RESTATED SECURITY AGREEMENT
This AMENDED AND RESTATED SECURITY AGREEMENT ("Agreement") made and
entered into this 5th day of March, 1998, by nSTOR TECHNOLOGIES, INC., a
Delaware corporation, with its principal place of business at 100 Century
Boulevard, West Palm Beach, Florida 33417; Fax: (561) 640-3160 ("Debtor")
in favor of H. Irwin Levy, an individual resident of the State of Florida
("Levy"), with a business address at 100 Century Boulevard, West Palm
Beach, Florida 33417; Fax: (561) 640-3160, Fairway Partnership, a
Minnesota general partnership ("Fairway"), with a business address at 5217
Wayzata Boulevard, Suite 212, Minneapolis, Minnesota 44316; Phone: (612)
546-6400, Fax: (612) 546-1928, Herbert Gimmelstob, an individual resident
of the State of Florida ("Gimmelstob"), with a business address at 777
Glades Road, Boca Raton, Florida 33434; Phone: (561) 852-2915, and Bernard
A. Marden, an individual resident of the State of Florida ("Marden"), with
a business address at 1290 South Ocean Boulevard, Palm Beach, Florida
33480; Phone: (561) 833-2001 ("Marden") (Levy, Fairway, Gimmelstob and
Marden are collectively referred to as the "Secured Parties");
WITNESSETH:
WHEREAS, each of Fairway, Gimmelstob and Marden have entered into Loan
Agreements of even date herewith with Debtor (collectively, the "New Loan
Agreements");
WHEREAS, Levy and Debtor have entered into an Amended and Loan Agreement
of even date herewith (the "Amended and Restated Loan Agreement", together
with the New Loan Agreements, the "Loan Agreements");
and
WHEREAS, pursuant to the Loan Agreements, as security for payment of the
indebtedness due thereunder and under the Promissory Notes of even date
therewith delivered pursuant to the Loan Agreement (the "Notes"), and in
consideration of the financial accommodations and agreements therein
contained, Debtor agreed to grant to Secured Parties a lien and security
interest in all assets now owned or hereafter acquired by Debtor;
WHEREAS, Debtor and Levy desire to amend and restate their Security
Agreements dated September 16, 1997, February 11, 1998 and February 17,
1998 (the "Prior Security Agreements") to include Fairway, Gimmelstob and
Marden as secured parties;
NOW, THEREFORE, in consideration of the foregoing, Debtor and Secured
Parties hereby agree to amend and restate the Prior Security Agreements as
follows:
1. Definitions. When used herein, the following capitalized defined
terms shall have the following respective meanings:
"Account Debtor" shall mean the party obligated on or under any Account
Receivable.
"Account Receivable" shall mean (a) any present or future right of the
Debtor to receive and collect payment for goods or services now or
hereafter rendered, to an Account Debtor, (b) all present and future
chattel paper and instruments acquired by the Debtor drawn, made, issued
or otherwise created in connection with any transaction giving rise to an
<PAGE>
Account Receivable and any proceeds thereof, (c) all present and future
rights of the Debtor to proceeds of any insurance, indemnity, warranty or
guaranty with respect to any goods sold or leased or services rendered in
a transaction giving rise to an Account Receivable, (d) all present and
future rights of the Debtor to claim for damages arising out of a breach
of or default under any contract, to terminate any contract giving rise to
any Account Receivable, to perform thereunder and to compel performance
and otherwise exercise all remedies thereunder, (e) all goods in the
Debtor's possession or held for the Debtor's account the sale or lease of
which shall have given rise to an Account Receivable and the proceeds of
any resale or subsequent lease thereof, and (f) all present and future
rights of Debtor to receive cash, property or other distributions from any
partnership arising out of or in connection with Debtor's interest as a
limited or general partner in such partnership.
"Chattel Paper" shall mean all of Debtor's now owned or hereafter acquired
chattel paper, such term having the broadest meaning attributable to it
under the Uniform Commercial Code in force in the state of Florida
(hereinafter the "Uniform Commercial Code").
"Collateral" shall mean all right, title and interest of the Debtor in and
to (i) any Account Receivable, (ii) all Inventory, (iii) all Equipment,
(iv) all Fixtures, (v) all Personal Property, (vi) all Chattel Paper,
(vii) all General Intangibles, (viii) all Documents, (ix) all Instruments,
(x) all bank accounts, cash, stock and all other assets of any nature or
kind now owned or hereafter acquired by Debtor, and all interest of Debtor
in any of the foregoing, together with (xi) all additions to,
substitutions for and all proceeds, products and accessions of any and all
property described and designated as (i) through (x) above and all
proceeds, monies, income, products and benefits attributable or accruing
to any of the foregoing property and which Debtor is or may hereafter
become entitled to receive on account of said property.
"Default" shall mean the occurrence of any one or more of the following
events: (a) the Debtor's failure to pay, when due, any amount payable in
respect of all or any portion of the Indebtedness; (b) the loss, theft,
destruction or encumbrance of, or substantial damage to, the Collateral or
any portion thereof or the making of any levy, seizure or attachment
thereof or therein; (c) the Debtor's failure to refusal to perform, or
breach or violation of any of the terms, covenants, representations or
warranties of, or occurrence of any event of default under this Agreement,
the Loan Agreements, the Notes or any other instrument, document or
agreement evidencing, securing or relating to any portion of the
Indebtedness; (d) the Debtor's failure to pay debts as and when due and
payable, or the making of any assignment by Debtor for the benefit of
creditors; (e) the commencement of any proceedings by or against Debtor
under any insolvency, bankruptcy or other debtor relief laws in any
jurisdiction, including without limitation any such proceedings seeking
the liquidation, arrangement, or reorganization of the Debtor under any
bankruptcy or insolvency procedure, or any formal or informal proceeding
for the liquidation, dissolution or settlement of claims by or against the
Debtor; (f) any application for the appointment of a receiver for the
assets of Debtor, (g) the entry of a judgment against the Debtor or (h)
the occurrence of an Event of Default under the Loan Agreements or the
Notes (as Event of Default is defined therein).
"Documents" shall mean all documents now owned or hereafter acquired by
Debtor, such term having the broadest meaning attributable to it under the
Uniform Commercial Code or other applicable law.
"Fixtures" shall mean all goods, chattels, fixtures, equipment and all
personal property affixed or in any manner attached to any land and/or
<PAGE>
building(s) or structure(s) thereon, now owned or hereafter acquired by
Debtor or in which Debtor now owns or hereafter acquired any interest,
including all additions, accessions and appurtenances thereto, all
replacements and substitutions therefor, and all proceeds, products and
accessions, thereof, however attached or affixed and wherever located. As
used herein the term "Fixtures" shall have the broadest meaning
attributable to it under the Uniform Commercial Code or other applicable
law.
"General Intangibles" shall mean all personal property other than goods,
accounts, chattel paper, documents and instruments, now owned or hereafter
acquired by Debtor, such term having the broadest meaning attributable to
it under the Uniform Commercial Code or other applicable law, and
including without limitation all things in action, all contract rights,
subscription rights and all rights and interests of any nature or kind now
owned or hereafter acquired by Debtor in any partnership, venture or other
business association or entity.
"Indebtedness" shall mean (a) all liabilities and obligations of Debtor to
Secured Parties arising under or pursuant to any or all of the Loan
Agreements, the Notes or this Agreement, (b) all renewals, extensions,
increases, modifications and/or rearrangements or reschedulings of any or
all of the foregoing referenced liabilities and obligations and of any
part thereof, and any substitutions of the same, to which the Secured
Parties may hereafter agree in writing, and (c) all costs, expenses and
attorneys' fees and legal expenses which may be paid or incurred by the
Secured Parties in connection with (x) enforcing payment by Debtor of the
Indebtedness, (y) enforcing its security interest hereunder, or (z)
protecting, preserving, handling, dealing with, selling or otherwise
disposing of or realizing upon the Collateral or its security interest
therein.
"Instruments" shall mean all instruments now owned or hereafter acquired
by Debtor, such term having the broadest meaning attributable to it under
the Uniform Commercial Code or other applicable law.
"Inventory" shall mean all goods now or hereafter (a) held by Debtor for
sale or lease, (b) furnished or to be furnished by Debtor to a third party
under any contract of service, (c) held by Debtor as raw materials or work
in process or (d) used or consumed by Debtor in the ordinary course of
business.
"Personal Property" shall mean all goods and all personal property of any
nature or description, wherever located, now owned or hereafter acquired
by Debtor, together with all additions or appurtenances thereto, all
substitutions therefor, and all proceeds, products and accessions thereof.
As used herein the term "goods" shall have the broadest meaning
attributable to it under the Uniform Commercial Code or other applicable
law.
2. Grant of Security Interest. As security for the payment of the
Indebtedness, the Debtor hereby grants, pledges and assigns to the Secured
Parties a continuing security interest in the Collateral.
3. Perfection of Security Interest.
(a) Financing Statements and Other Actions. The Debtor hereby
authorizes the Secured Parties to file one or more financing or
continuation statements, and amendments thereto, relating to all or any
part of the Collateral, without the signature of the Debtor where
permitted by applicable law, and agrees itself to take all such other
actions and to execute and deliver and file or cause to be filed such
<PAGE>
financing statements, continuation statements, and other documents, as the
Secured Parties may reasonably require in order to establish and maintain
a perfected, valid and continuing security interest of the Secured Parties
in the Collateral.
(b) Delivery. The Debtor agrees immediately to deliver to the
Secured Parties, appropriately endorsed to the order of the Secured
Parties, any Document or Instrument of which the Debtor is or becomes
owner or holder.
4. Records; Information. The Debtor agrees to keep at its principal
place of business, as shown in the opening paragraph of this Agreement,
its records concerning the Collateral, which records shall be sufficiently
accurate to enable the Secured Parties or its designee to determine at any
time the status thereof. The Debtor agrees promptly to furnish to the
Secured Parties such information concerning the Debtor, the Collateral and
any Account Debtor as the Secured Parties may reasonably request.
5. Representations and Warranties of the Debtor. The Debtor represents
and warrants that: (a) it is a corporation duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
incorporation and is qualified to do business in all such jurisdictions in
which it is doing business, (b) the execution, delivery and performance of
this Agreement and the above pledge and assignment and grant of a security
interest in the Collateral to the Secured Parties have been duly
authorized and are not contrary to or in violation of law, any order of a
court or government agency, the Debtor's certificate of incorporation or
by-laws, or any other agreement, instrument, or other document to which
the Debtor is a party or by which the Debtor or any of its assets may be
bound, (c) this Agreement is the legal, valid and binding obligation of
the Debtor and, subject to the making of any filings required pursuant to
Section 3(a) hereof and the delivery of any Collateral to the Secured
Parties pursuant to Section 3(b) hereof, creates a valid, enforceable and
perfected security interest in the Collateral, first and prior to any or
all other liens, claims, encumbrances or security interests except for the
Permitted Liens and the Pari Passu Liens (as such terms are defined in the
Loan Agreements), and the Debtor is duly authorized to make all filings
and take all other actions necessary or desirable to perfect and to
continue perfected such security interest, (d) all of the Debtor's right,
title and interest in and to the Collateral is free and clear of all
liens, claims, charges, pledges, security interests and encumbrances,
except for the security interests granted to the Secured Parties herein,
the Permitted Liens and the Pari Passu Liens (as such terms are defined in
the Loan Agreements), and (e) no consent of any person or entity is
required, except such as have been obtained in writing by Debtor and
delivered to Secured Parties, in order to render this Agreement, the Loan
Agreements and the Notes fully enforceable against the Debtor in
accordance with their terms or to prevent the execution and delivery of
this Agreement, the Loan Agreements and the Notes from violating the terms
of or giving rise to a default or event of default under any other
agreement, instrument or document to which the Debtor is a party or by
which the Debtor or any of its assets are bound.
6. Covenants.
(a) Affirmative Covenants. The Debtor shall (i) perform and
observe all the terms and provisions of any agreement for the rendering of
services or any other agreement, giving rise to an Account Receivable to
be performed or observed by it, maintain any such agreement in full force
and effect, enforce any such agreement in accordance with its terms, and
take all such action to such and as may be from time to time requested by
the Secured Parties; (ii) at the Debtor's expense, furnish to the Secured
<PAGE>
Parties promptly upon receipt thereof copies of all notices, requests and
other documents received by the Debtor in connection with any Account
Receivable, and from time to time (x) furnish to the Secured Parties such
information and reports regarding any Account Receivable as the Secured
Parties may reasonably request, and (y) upon request of the Secured
Parties, make to any Account Debtor such demand and request for
information and reports or for such action as the Debtor may be entitled
to make in connection with any Account Receivable; (iii) at the Debtor's
expense, take such action as the Debtor or the Secured Parties may deem
necessary or advisable to enforce collection of amounts due or to become
due in respect of any Account Receivable; (iv) take out and maintain in
effect such policies of insurance covering the Collateral as the Secured
Parties may reasonably require; and (v) maintain and preserve the
Collateral in good condition and take all such action to such end as may
be from time to time requested by the Secured Parties.
(b) Negative Covenants. The Debtor shall not without the prior
written consent of the Secured Parties (i) sell, assign or otherwise
dispose of the Collateral, or (ii) create or suffer to exist any security
interest, financing statement, lien or other encumbrances upon or with
respect to the Collateral to secure indebtedness of any person or entity,
except for the security interest granted to the Secured Parties hereunder
and the Permitted Liens (as defined in the Loan Agreements).
7. Rights of the Secured Parties upon Default. On and after the
occurrence of a Default by the Debtor, all the Indebtedness shall, at the
option of the Secured Parties, become immediately due and payable, without
notice or demand. The Secured Parties may (a) enforce collection of any
of the Collateral by suit or any other lawful means available to the
Secured Parties, (b) surrender, release or exchange all or any part of the
Collateral, or compromise or extend or renew for any period any
indebtedness thereunder or evidenced thereby, (c) assert all other rights
of a secured party under the Uniform Commercial Code or other applicable
law, including, without limitation, the right to take possession of, hold,
collect, sell, lease or otherwise retain, liquidate or dispose of all or
any portion of the Collateral. The proceeds of any collection,
liquidation or other disposition of the Collateral shall be applied by the
Secured Parties first to the payment of all expenses (including without
limitation, all fees, taxes, reasonable attorney's fees and legal
expenses) incurred by the Secured Parties in connection with retaking,
holding, collecting, or liquidating the Collateral. The balance of such
proceeds, if any, shall, to the extent permitted by law, be applied to the
payment of the Indebtedness in such order of application as the Secured
Parties may, in its sole discretion, elect. In case of any deficiency,
the Debtor shall, whether or not then due, remain liable therefor. In
addition to the foregoing, the Secured Parties shall be entitled to
exercise any and all other rights and remedies provided to Secured Parties
under this Agreement, the Loan Agreements, the Notes, and applicable law
and equity.
8. The Secured Parties' Duties and Right to Perform. The powers
conferred on the Secured Parties hereunder are solely to protect the
Secured Parties' interest in the Collateral and shall not impose any duty
upon it to exercise any such powers. The Secured Parties shall have no
duty as to the Collateral or as to the taking of any necessary steps to
preserve rights against prior parties or any other rights pertaining to
the Collateral. If the Debtor fails to perform any of its obligations
hereunder, or under any agreement giving use to or in connection with any
Account Receivable, the Secured Parties may themselves perform, or cause
the performance of, such agreement, and the expenses of the Secured
Parties incurred in connection therewith shall be payable by the Debtor.
<PAGE>
9. Indemnity and Expenses. The Debtor agrees to indemnify the Secured
Parties from and against any and all claims, losses and liabilities
arising out of or connected with this Agreement (including, without
limitation, enforcement of this Agreement), except claims, losses or
liabilities resulting solely from the Secured Parties' gross negligence or
wilful misconduct.
10. Security Interest Absolute. All rights of the Secured Parties
hereunder, and all obligations of the Debtor hereunder, shall be absolute
and unconditional, irrespective of:
(a) any lack of validity or enforceability of the Indebtedness or
any agreement or instrument contemplated thereby;
(b) any change in the time, manner or place of payment of, or in
any other term of, all or any of the Indebtedness, or any other amendment
or waiver of or any consent to any departure from the terms of the
Indebtedness or any other agreements contemplated thereby;
(c) any exchange, release or non-perfection of any other security
interest, or any release or amendment or waiver of or consent to departure
from any guaranty, for all or any of the Indebtedness; or
(d) any other circumstance (other than payment in full) which might
otherwise constitute a defense available to, or a discharge of, the Debtor
in respect of the Indebtedness or in respect of this Agreement.
11. Cumulative Security. Neither the execution and delivery of this
Agreement nor the taking hereafter of any security for payment of the
Indebtedness shall in any manner impair or affect any other security for
payment of the Indebtedness. All such present and future additional
security is to be considered as cumulative security.
12. Continuing Agreement. This is a continuing agreement and the grant
of a security interest hereunder shall remain in full force and effect and
all the rights, powers and remedies of Secured Parties hereunder shall
continue to exist until the Indebtedness is paid in full as the same
becomes due and payable and until Secured Parties, upon request of Debtor,
has executed a written termination statement, reassigned to Debtor without
recourse the Collateral and all rights conveyed hereby, and returned
possession of the Collateral to Debtor.
13. Notices. All notices, requests and other communications to either
party hereunder shall be in writing and shall be given to such party at
its address or telefax number set forth at the beginning of this Agreement
or such other address or telefax number of which such party may hereafter
give notice to the other. Each such notice, request or other
communication shall be effective (i) if given by telefax, upon
transmission with a machine-generated transmittal confirmation, (ii) if
given by mail, 72 hours after such communication is deposited in the
United States mails with first class postage prepaid, addressed as
aforesaid, or (iii) if given by any other means, when delivered at the
address specified in this Section.
14. Remedy and Waiver. Secured Parties may remedy any Default without
waiving the Default rendered, and may waive any Default without waiving
any prior or subsequent Default. No failure or delay by the Secured
Parties in the exercise of any right or remedy under this Agreement or
under the Uniform Commercial Code or any applicable law shall operate as
a waiver hereunder or thereunder, and no partial exercise by the Secured
Parties of any right or remedy of the Secured Parties hereunder or
<PAGE>
thereunder shall preclude the further exercise by the Secured Parties of
any other right or remedy hereunder or thereunder.
15. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Florida.
16. Successors and Assigns. The rights and obligations of the parties
hereto shall be binding on and shall inure to the benefit of their
successors and assigns, except that in accordance with Section 6 of this
Agreement, the rights and obligations hereunder may not be assigned by
Debtor.
17. Modification. This agreement or any provision hereof may be modified
or amended only by a written agreement signed by both parties hereto.
18. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
taken together shall constitute one and the same instrument.
IN WITNESS WHEREOF, this Agreement has been duly executed as of the day
and year first above written.
DEBTOR
nSTOR TECHNOLOGIES, INC.
/s/ Mark F. Levy
By:______________________________
Mark F. Levy, President
Title:
SECURED PARTIES
/s/ H. Irwin Levy
__________________________________
H. Irwin Levy
/s/ Bernard A. Marden
__________________________________
Bernard A. Marden
/s/ Herbert Gimmelstob
__________________________________
Herbert Gimmelstob
FAIRWAY PARTNERSHIP
/s/ Valerie Herschman Revocable Trust
_____________________________________
By: Valerie Herschman Revocable Trust,
a partner
Shirley Fiterman
By:________________________________________
Shirley Fiterman, Trustee
<PAGE>
EXHIBIT 10.20
COLLATERAL ASSIGNMENT OF NOTE, LOAN AGREEMENT,
SECURITY AGREEMENT AND SECURITY INSTRUMENTS
THIS COLLATERAL ASSIGNMENT OF NOTE, LOAN AGREEMENT, SECURITY AGREEMENT AND
SECURITY INSTRUMENTS (the "Assignment") is made the 5th day of March,
1998, by NSTOR TECHNOLOGIES, INC., a Delaware corporation ("Assignor") in
favor of in favor of H. Irwin Levy, an individual resident of the State of
Florida ("Levy"), Fairway Partnership, a Minnesota general partnership,
Herbert Gimmelstob, an individual resident of the State of Florida, and
Bernard A. Marden, an individual resident of the State of Florida
(collectively, the "Assignees").
FOR GOOD AND VALUABLE CONSIDERATION, the receipt and sufficiency whereof
is hereby acknowledged, and to insure the full and timely payment of all
sums due and to become due and performance under those certain Promissory
Notes dated March 5, 1998 in favor of Assignees (the "Assignee Notes"),
the Assignor does hereby collaterally grant, transfer and assign unto the
Assignees as collateral security the Assignor's entire right, title and
interest in and to the following original instruments (collectively
referred to herein as the "Assigned Instruments"):
1. Revolving Credit Note ("Note") in the original principal amount of
$5,000,000 issued by Assignor to nStor Corporation, Inc. ("Borrower")
dated March 5, 1998.
2. Amended and Restated Loan Agreement between Borrower and Assignor,
dated March 5, 1998 ("Loan Agreement").
3. Amended and Restated Security Agreement between Borrower and
Assignor, dated March 5, 1998 ("Loan Agreement").
4. UCC-1 Financing Statement filed with the Secretary of State of
Florida at File No. 980000051936.
By this Assignment, Assignor agrees and by its acceptance hereof Assignee
agrees that any uncured default after any applicable notice and cure
period under the Loan Agreement, as defined therein, shall constitute a
default under this Assignment. This Assignment shall constitute a present
assignment, transfer and conveyance by Assignor to Assignee of the
Assigned Instruments.
This Assignment is made subject to all of the applicable terms and
conditions of the Assignee Notes.
As an inducement for Assignees to accept this Assignment, Assignor hereby
represents and warrants to Assignees that: (i) the Assigned Instruments
are in full force and effect in accordance with their terms and have not
been amended, (ii) no default has occurred and is continuing under any of
the Assigned Instruments, and to the best knowledge of Assignor, no
circumstance or state of facts exists which, with the giving of notice or
passage of time, or both, would result in the occurrence of any such
default, (iii) Borrower has made all payments heretofore due and owing
pursuant to the Assigned Instruments, and (iv) neither Borrower nor
Assignor has any rights of offset or defenses with respect to its
respective obligations under the Assigned Instruments.
This Assignment may be executed in one or more counterparts, each of which
shall be deemed an original, but all of which taken together shall
constitute one and the same instrument.
<PAGE>
IN WITNESS WHEREOF, this Assignment has been executed as of the date
first set forth above.
Witnesses:
NSTOR TECHNOLOGIES, INC.,
a Delaware corporation
By: /s/ Mark F. Levy
______________________________
Mark F. levy, Presdient
/s/ Margaret Diane Bly
________________________________
Printed Name: Margaret Diane Bly
/a/ Laura J. Friedman
________________________________
Printed Name: Laura J. Friedman
Accepted:
/s/ H. Irwin Levy
________________________________
H. Irwin Levy
/s/ Bernard A. Marden
________________________________
Bernard A. Marden
/s/ Harbert Gimmelstob
________________________________
Herbert Gimmelstob
FAIRWAY PARTNERSHIP
By: Valerie Herschman Revocable Trust,
a partner
/s/ Shirley Fiterman, Trustee
By:___________________________________
Shirley Fiterman, Trustee
STATE OF FLORIDA )
) SS.
COUNTY OF PALM BEACH)
The foregoing instrument was acknowledged before me this 6th day of March,
1998, by Mark F. Levy, as President of nStor Technologies, Inc., a
Delaware corporation. He is personally known to me or has produced
_________________ as identification.
(NOTARY SEAL)
Name: Margaret Diane Bly
Notary Public, State of Florida
Commission No.
<PAGE>
EXHIBIT 10.21
H. IRWIN LEVY
100 CENTURY BOULEVARD
WEST PALM BEACH, FLORIDA 33417
March 6, 1998
H. IRWIN LEVY
100 CENTURY BOULEVARD
Mr. Bernard A. Marden
Mr. Herbert Gimelstob
Fairway Partnership
Attention: Ms. Shirley Fiterman
Re: Loan to nStor Technologies, Inc.
Lady and Gentlemen:
This letter is intended to memorialize and confirm [certain of] the terms
of our agreement to participate in a combined loan in the aggregate
principal amount of $5,000,000.00 (hereinafter sometimes referred to as
the "Combined Loan") to be advanced to nStor Technologies, Inc.
("Borrower") by H. Irwin Levy ("Levy"), Bernard A. Marden ("Marden"),
Herbert Gimelstob ("Gimelstob") and Fairway Partnership ("Fairway").
Levy, Marden, Gimelstob and Fairway are hereinafter sometimes collectively
referred to as the "Constituent Lenders" and each, individually, as a
"Constituent Lender".
The Combined Loan shall be comprised of four (4) constituent loans
(hereinafter sometimes collectively referred to as the "Constituent
Loans", and each, individually, as a "Constituent Loan"), such Constituent
Loans to be in the principal amount of, respectively, $2,000,000.00 (the
"Levy Constituent Loan"), $1,000,000.00 (the "Marden Constituent Loan"),
$1,000,000.00 (the "Gimelstob Constituent Loan"), and $1,000,000.00 (the
"Fairway Constituent Loan").
The Levy Constituent Loan shall be advanced to the Borrower by Levy; the
Marden Constituent Loan shall be advanced to the Borrower by Marden; the
Gimelstob Constituent Loan shall be advanced to the Borrower by Gimelstob;
the Fairway Constituent Loan shall be advanced to the Borrower by Marden.
Each Constituent Loan shall be:
(a) advanced to the Borrower simultaneously with the advancement of the
other Constituent Loans;
(b) advanced to the Borrower pursuant to a Loan Agreement to be entered
into by and between the Borrower and the Constituent Lender making such
Constituent Loan; and
<PAGE>
(c) evidenced by Promissory Note of the Borrower in the amount of that
Constituent Loan and made payable to the order of that Constituent Lender.
Any and all payments made by the Borrower in respect of either the
Combined Loan or any Constituent Loan shall be distributed among the
Constituent Lenders on a pari passu and pro rata basis. For example, a
$1,000,000.00 principal payment by the Borrower in respect of either the
Combined Loan of any Constituent Loan shall be distributed among the
Constituent Lenders as follows: $400,000.00 to Levy; $200,000.000 to
Marden; $200,000.000 to Gimelstob; and $200,000.000 to Fairway; with such
distributions to be made on a pari passu basis.
To the extent that any Constituent Lender shall receive payment from (or
for the account of) the Borrower of any amount which is in excess of such
Constituent Lender's pro rata share of the aggregate amount of all
payments then being made by (or for the account of) the Borrower to all
Constituent Lenders, the Constituent Lender receiving such excess payment
shall be deemed to have received same as trustee for the benefit of all
Constituent Lenders, and such Constituent Lender shall be obligated,
forthwith, to remit to the other Constituent Lenders such portion of such
excess payment as shall be necessary in order to ensure that each
Constituent Lender shall receive its correct pro rata share of the
aggregate amount of all payments then being made by (or for the account
of) the Borrower.
The Combined Loan (consisting of the four [4] Constituent Loans) shall be
secured by a single combined lien upon, and security interest in, certain
assets of the Borrower (the "Collateral), such lien and security interest
to be created pursuant to the terms of a single Security Agreement to be
executed by the Borrower and the Constituent Lenders, and to be perfected
by the filing of one or more UCC-1 Financing Statements, etc. Such lien
and security interest shall be owned and held by the Constituent Lenders
as tenants in common, with each Constituent Lender owning and holding an
undivided pro rata interest in such combined lien and security interest as
follows: Levy shall own and hold an undivided forty percent (40%)
interest therein; Marden shall own and hold an undivided twenty percent
(20%) interest therein; Gimelstob shall own and hold an undivided twenty
percent (20%) interest therein; and Fairway shall own and hold an
undivided twenty percent (20%) interest therein.
The undivided pro rata interest of each Constituent Lender in such
combined lien and security interest shall enjoy equal priority with the
undivided pro rata interests therein of all other Constituent Lenders. No
Constituent Lender shall have any lien, claim or charge upon any of the
Collateral which shall be senior or superior to the lien, claim or charge
of any other Constituent Lender nor shall any Constituent Lender have any
lien, claim or charge upon any of the Collateral which is in excess of
his/its undivided pro rata share thereof, to wit: Forty Percent (40%) for
Levy; Twenty Percent (20%) for Marden; Twenty Percent (20%) for Gimelstob;
and Twenty Percent (20%) for Fairway.
Any and all proceeds derived from any disposition of the Collateral shall
be distributed among the Constituent Lenders on a pari passu and pro rata
basis, i.e., in the respective proportions noted above.
In the event that the Constituent Lenders shall acquire title to, or any
other rights in, the Collateral, or any part thereof, the Constituent
Lenders shall be deemed to own and hold such title and/or other rights as
tenants in common, with each Constituent Lender owning and holding an
undivided pro rata interest in such Collateral as follows: Levy shall own
and hold an undivided forty percent (40%) interest therein; Marden shall
<PAGE>
own and hold an undivided twenty percent (20%) interest therein; Gimelstob
shall own and hold an undivided twenty percent (20%) interest therein; and
Fairway shall own and hold an undivided twenty percent (20%) interest
therein.
In the event that any Constituent Lender shall, individually, acquire
title to, or any other rights in, the Collateral, or any part thereof as
a result of the foreclosure or enforcement of any security interest with
secures such Constituent Lender's Constituent Loan, such Constituent
Lender shall be deemed, without need of any further action or
confirmation, to own and hold such Collateral as trustee for the benefit
of all Constituent Lenders, who shall be deemed to own and hold the
beneficial interests in such Collateral as tenants in common, in the
respective proportions noted above.
Any and all costs of collection and enforcement of the Combined Loan shall
be shared by the Constituent Lenders on a pari passu and pro rata basis.
By signing this letter in the place designated below, we acknowledge and
confirm our agreement to the foregoing terms and conditions.
Sincerely,
/s/ H. Irwin Levy
_________________________________
H. IRWIN LEVY
Confirmed, Acknowledged and Agreed:
/s/ Bernard A. Marden
__________________________________
Bernard A. Marden
/s/ Herbert Gimelstob
__________________________________
Herbert Gimelstob
/s/ Valerie Herschman Revocable Trust
_________________________________
Fairway Partnership
By: Valerie Herschman Revocable Trust
/s/ Shirley Fiterman, Trustee
By:_____________________________
Shirley Fiterman, Trustee
CONSENT AND AGREEMENT OF BORROWER
nStor Technologies, Inc. hereby consents to, and agrees to comply with,
the terms and provisions of the foregoing letter agreement.
nStor Technologies, Inc.
/s/ Mark F. Levy
By:____________________________
Mark F. Levy, President
EXHIBIT 21
Subsidiaries of the Company
and State of Incorporation or Formation
nStor Corporation, Inc. Delaware
Imge R & D, Inc. Delaware
Imge Distribution, Inc. Delaware
Imge Marketing, Inc. Delaware
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000075448
<NAME> NSTOR TECHNOLOGIES, INC.
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,085<F1>
<SECURITIES> 0
<RECEIVABLES> 4,363
<ALLOWANCES> 500
<INVENTORY> 3,577
<CURRENT-ASSETS> 8,787
<PP&E> 8,902<F2>
<DEPRECIATION> 927<F3>
<TOTAL-ASSETS> 16,762
<CURRENT-LIABILITIES> 10,221
<BONDS> 0
0
0
<COMMON> 934
<OTHER-SE> 4,103
<TOTAL-LIABILITY-AND-EQUITY> 16,762
<SALES> 26,244
<TOTAL-REVENUES> 26,364
<CGS> 21,461
<TOTAL-COSTS> 12,304
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 247
<INCOME-PRETAX> (7,648)
<INCOME-TAX> 238
<INCOME-CONTINUING> (7,886)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,886)
<EPS-PRIMARY> (.42)
<EPS-DILUTED> (.42)
<FN>
<F1>Cash balance includes $1,024 of restricted cash.
<F2>PP&E balance includes $6,385 of intangible assets.
<F3>Accumulated depreciation balance includes $470 of accumulated amortization.
</FN>
</TABLE>
