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, 1998
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.)
450 Technology Park, Lake Mary, Florida 32746
(Address of principal executive offices)
Registrant's telephone number, including area code: 407-829-3500
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
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Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. [ ]
AGGREGATE MARKET VALUE OF THE VOTING COMMON STOCK
HELD BY NONAFFILIATES OF THE REGISTRANT
Common Stock, par value $.05 per share ("Common Stock"), was the
only class of voting common equity of the Registrant outstanding
on December 31, 1998. Based on the last sales price of the Common
Stock on the American Stock Exchange ("AMEX") on March 31, 1999
($2.125), the aggregate market value of the approximately
16,279,000 shares of the voting 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 $34.6 million.
By the foregoing statements, the Registrant does not intend to
imply that any of these officers, directors or beneficial owners
are affiliates of the Registrant or that the aggregate market
value, as computed pursuant to rules of the Securities and Exchange
Commission, is in any way indicative of the amount which could be
obtained for such shares of Common Stock.
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the Registrant has filed all
documents and reports required to be filed by Section 12, 13, or
14(d) of the Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a court.
Yes ____ No ____
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
Indicate the number of shares outstanding of each of the
Registrant's classes of common stock, as of the latest practicable
date:
21,492,258 shares of Common Stock, par value $.05
per share, were outstanding as of March 31, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
Definitive Proxy Statement of nStor Technologies, Inc.
for the 1999 Annual Meeting of Stockholders
(incorporated in Part III)
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PART I
Item 1. Business
GENERAL
nStor Technologies, Inc., through its operating subsidiary, nStor
Corporation, Inc. (collectively, "nStor" or "the Company") is
engaged as a manufacturer and supplier of high-performance
information storage solutions, including external RAID (Redundant
Array of Independent Disks) subsystems, Network Attached Storage,
data storage enclosures, storage management software solutions and
AdaptiveRAID technology (see "Current Product Offerings").
Our RAID subsystems provide high-availability (ability to remain on
line and accessable), high-performance (ability to record and
access data with the greatest amount of speed and accuracy),
enterprise-wide storage solutions for critical data on PC-LAN and
UNIX platforms, utilizing the latest technology architectures,
including Fibre Channel, Ultra2 LVD (low voltage differential) SCSI
(Small Computer Systems Interface), and Ultra SCSI. Our product
line supports a variety of operating systems, including Microsoft
Windows NT, Novell NetWare, IBM OS/2, Mac, SCO UNIX, UnixWare, SGI
IRIX, Sun Solaris, and Linux. Our 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. We sell our
RAID products through a network of original equipment manufacturers
("OEM's") and a two-tier channel distribution through vertical and
geographical distributors/resellers located worldwide.
Our executive and business headquarters are located at 450
Technology Park, Lake Mary, Florida 32746 and our telephone number
is (407) 829-3500. Information regarding nStor can be accessed
through the World Wide Web at http:// www.nStor.com.
Recent Developments
Proposed Acquisition
In March 1999, we entered into an agreement to purchase 75% of the
outstanding common stock of Andataco, Inc. ("Andataco") from its
principal stockholder, David Sykes. That agreement also contemplates
that we would purchase from Mr. Sykes a note in the principal amount
of $5,196,000, issued to him by Andataco. Following the purchase of
Mr. Sykes' shares, he would continue to serve as President of Andataco,
pursuant to a proposed three-year employment agreement. The purchase
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is contingent on our raising the capital necessary to fund the acquisition.
If the transaction is completed, it would be our intention to acquire the
remaining Andataco shares as soon as possible following an independent
professional determination of the fair value of such shares.
We are currently negotiating with unrelated private investors to obtain
approximately $15 million in a private placement of convertible preferred
stock (the "Private Placement"). Proceeds from the Private Placement would
be used to finance the proposed Andataco acquisition, if consummated, and
to provide additional working capital for our company. There can be no
assurance, however, that we will be successful in obtaining the funds
necessary to finance the proposed acquisition nor that the acquisition
will be completed.
Significant New OEM
In March 1999, we received the initial purchase order under a recently
established OEM relationship to supply high-performance RAID storage
enclosures to Silicon Graphics, Inc. (SGI), a major computer server manu-
facturer. The purchase order calls for us to ship approximately $5.8 million
of products to SGI commencing in the second quarter of 1999. The initial
term of the OEM arrangement is expeced to be for three (3) years. A
discontinuation or significant reduction of this relationship could have a
material adverse effect on our business.
INDUSTRY
During recent years, the demand for increased information storage
capacity has grown dramatically. Businesses today often rely on
computing resources 7 days a week, 24 hours a day. This increased
demand for information has created a growing market for companies
that provide bundled or totally integrated storage products and
services. Fault-tolerant storage management plays a vital part in
protecting critical data in every aspect of the economy. The
explosion of the Internet/Intranet and the creation of millions of
web sites worldwide has accelerated this need for available,
reliable data storage. The digital content creation and
multimedia industry, with its intense storage/retrieval requirements,
continually requires larger reliable storage systems, including those
used for photo retouching, video editing, graphic designers and graphic
animation products. Libraries, hospitals, law firms and government
entities all use document imaging to store millions of records each year
and computer data storage systems must accommodate search requests
quickly and consistently.
According to DataQuest, a unit of Gartner Group, Inc. that provides
global market research and consulting services for the information
technology industry, estimated network and RAID-based storage
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revenue will approach $27.4 billion in 1999. The market is also
expected to show strong growth through the rest of the decade, with
DataQuest forecasting storage revenues to surpass $32 billion in
2000. While the revenue forecast for the RAID industry is
estimated at a 17% compounded annual growth rate through 2002, DataQuest
estimates that the demand for storage capacity in terabytes (TB) will
grow at a rate of 81% compounded annual growth rate for the same period.
This growth supports the increasing demand for more storage capacity.
Significant factors contributing to the growth of the industry
include: the rapid adoption of Windows NT, migration of storage
into larger disk arrays, and the changing landscape in interface
and connectivity of storage devices. Currently, UNIX and Windows
NT operating system platforms make up more than 80% of the combined
RAID revenue estimate. Although UNIX provides a larger installed
base, Strategic Research Corporation estimates that more than 80%
of all networks have mixed operating systems. The mixed operating
system environment, coupled with the rapidly changing storage
architectures, supports the rapidly increasing demand for Windows
NT. Additionally, the strong growth rate in the Windows NT
operating system space has accelerated add-on purchases of external
RAID systems.
RAID technology is an effective tool to protect network computer
users from the loss of critical disk data. We believe that RAID
subsystems will continue to play a significant role as the
preferred method for data storage in network environments. We also
believe that we are well positioned to provide fault-tolerant
information storage systems to all segments of the market and will
be able to participate in the forecasted growth in the information
storage market. However, there can be no assurance that we will be
successful in these efforts due to the possibility of increased
competition, the development of alternative technologies, and other
factors.
RAID TECHNOLOGY
RAID, a concept developed in 1988 by a team of researchers from the
University of California at Berkeley, is an information storage
technology consisting of three or more disk drives working together
as one, using proprietary hardware and software to achieve
extremely fast data transfer and Input/Output (I/O) rates, high
levels of redundancy and large storage capacities.
RAID subsystems are able to achieve 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. They are also 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
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(opening or saving) of data from the disk.)
Redundancy refers to the replication of certain data within the
RAID subsystem so that if one disk drive or other redundant
component, such as a power supply, fails within the disk array, no
data is lost and the application continues uninterrupted. In the
event of such a failure, the failed component can be "hot-swapped"
for a new component (exchanged without system shut down). By
linking together multiple disk drives, RAID subsystems
significantly enhance storage capacities.
The recent proliferation of Internet, video and multimedia applications,
coupled with the continued installation of client/server-based networks,
has placed continuing demand on disk storage resources in terms of capacity,
performance and fault-tolerance. The RAID technology initially introduced in
1988 was specifically designed to improve the performance and fault
tolerance of disk-based subsystems. The algorithms and features of
"first-generation" RAID products have been widely implemented.
However, since its introduction, many of the technology's initial
shortcomings and limitations still exist, such as the inability to
adapt to I/O workload and dedicated RAID levels, complex system
configuration and performance tuning, performance limitations as a
result of writing in one of the RAID levels (RAID-5) and limited or
no online capacity expansion. With the forecasted growth in the
demand for RAID products, a significant market opportunity exists
for our "next-generation" RAID products (see Current Product
Offerings).
PRODUCTS
Product Strategy
The technology used as the foundation for the nStor RAID product
family was first introduced in 1994, when the storage systems
division of Conner Peripherals ("Conner"), which previously owned
our RAID business, began investing in the CR8 RAID subsystem. Over
the next two years, several additional products were added to the
RAID family and the nStor brand name was adopted.
In 1995, Intel Corporation approached Conner to co-develop the SAF-TE (SCSI
Accessed Fault-Tolerant Enclosures) specification and to
disseminate the specification free of charge to the computer
industry. The SAF-TE specification plays a significant role in
lowering the total cost of computer system ownership by providing
a standard method for sending and receiving information using
standard interfaces as well as new SCSI standards and protocols as
they evolve. Products compliant with the SAF-TE specification
reduce the cost of managing storage enclosures, making it easier
for the LAN ("local area network") administrator to obtain base-level,
fault-tolerant, alert notification and status information. We have
continued to introduce new SAF-TE compliant storage
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subsystems based on the latest SCSI I/O, subsystem and network
management technologies. Additional information about the SAF-TE
specification can be found on the World Wide Web at http://www.safte.org.
Designed to reduce the cost of computer system ownership, our
external RAID subsystems employ hot swap components, advanced
cooling systems and redundant N+1 architectures ("N+1 Architecture")
to improve data reliability and availability. (N+1 Architecture requires
the minimum number of components installed to support the system plus one
additional hard drive as a backup.) Hot swap drives, power supplies and
cooling fans eliminate single points of failure within an individual
storage device, keeping data online and available when needed.
Every 5-degrees centigrade increase in operating system temperature
reduces drive MTBF (Mean Time Between Failure) by 10%. Inadequate
cooling can result in reduced drive life and lost data. Our air-
plenum design provides uniform, adequate cooling regardless of the
number of drives in use.
Current Product Offerings
AdaptiveRAID List price range: $799-$23,774(a)
AdaptiveRAID is a patented next-generation RAID technology that
offers fault tolerance and data protection, along with the highest
performance presently available by automatically determining the
optimal RAID level and eliminating RAID 5 write performance
limitations and many of the RAID limitations currently associated
with adding disk drives to an array. Additional disk drives can be
added to increase storage capacity without downing the server,
regardless of operating system environment. To maximize array
capacity and allow users to add additional disk capacities without
regard to prior disk capacity purchases, the AdaptiveRAID
technology allows disks of varying sizes to be configured into an
array without sacrificing disk capacity or performance.
NexStor 8Le List price range: $9,159-$27,151(a)
The NexStor 8Le is the first of nStor's next-generation line of
high-performance fault tolerant disk subsystems. Offered as a
turnkey solution with an integrated Ultra2 or Fibre-to-Ultra2 RAID
controller and a configurable Operator Control Panel, the NexStor
8Le offers operating system independence. The 8-bay rack-mount or
deskside tower enclosure supports 4, 9 or 18GB (gigabytes) disk
drives, offering a total capacity of 144GB per enclosure.
Additional features include: redundant, hot-swappable disk drives,
fans, and power supplies; capacity expansion; RAID level migration;
and AdminiStor Management Software which provides system
management tools such as alerts and other monitoring functions.
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NexStor 18F List price range: $8,249-$32,250(a)
The NexStor 18F, currently the industry's highest density storage
solution, accommodates eighteen 9GB or 18GB disk drives (up to
324GB) in a compact 19-inch rack enclosure. Supporting both a JBOD
(Just a Bunch of Disks) configuration or an optional single-loop or
dual-loop Fibre Channel RAID controller, the NexStor 18F provides
the greatest presently available cross-platform scalability
(ability to expand capacity) and high availability for document
imaging, web servers, on-line transaction processing, data
warehousing, video and multimedia systems. Our NexStor 18F
enclosure features a cable-less, passive dual Fibre Channel
Arbitrated Loop backplane (to which many of the storage devices are
connected) engineered to incrementally boost performance and
availability through a modular design that provides the maximum
level of reliable fault tolerance and performance. The air-plenum
cooling design provides support for 7,200 RPM (rotations per
minute) and 10,000 RPM disk drives, as well as support for the
higher capacity 36GB disk drives when they are available. Other
system features include data transfer rates up to 200MB
(megabytes)/second, support for up to 126 storage devices, dual
power cords, support for cable lengths up to 30 meters utilizing a
copper interface or up to 10 kilometers utilizing fibre optics, and
redundant, hot-swappable disk drives, fans, power supplies and loop
resiliency circuits.
CR8e List price range: $4,159-$26,230(a)
The SAF-TE compliant CR8e is an 8-bay rack-mountable or deskside
tower RAID subsystem containing 4, 9 or 18 GB disk drives (up to
144 GB's of storage per enclosure). Features include Ultra/Wide
SCSI (40MB/second) performance and enhanced fault tolerant
features such as hot-swap drives; dual, redundant hot-swap power
supplies and variable-speed fans; disk capacity expansion without
shutting down; RAID level migration, and AdminiStor Management
Software.
CR8L List price range: $4,229-$25,131(a)
The CR8L is an OEM-grade 8-bay subsystem, available in either a 19"
rack mount or tower-based configuration. The CR8L supports 4GB,
9GB, and 18GB (7,200 or 10,000 RPM) disk drives, providing 144GB of
storage per system. Multiple CR8L systems can be combined to
provide scalable storage capacities in excess of 2 TB. The Ultra2
(LVD) SCSI-3 architecture provides data transfer speeds up to
80MB/second and supports 15 SCSI storage devices per channel, as
well as cable lengths up to 12 meters. Features include a cable-less
backplane design, support for global and hot spares, redundant
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dual power supplies and cooling fans that are hot swappable under
load conditions, and improved data availability and reliability. An
Operator Control Panel provides subsystem component status,
temperature control monitoring, alarm threshold settings,
assignment of SCSI-IDs, password control, diagnostic results,
firmware information and protection for critical menu items.
CR8F List price range: $4,439-$28,440(a)
The CR8F is an external 8-bay tower or rack-mountable enclosure
based on the Fibre Channel-Arbitrated Loop interconnect standard.
Designed to offer maximum fault tolerance and performance (up to
200MB per second, dual loop), the passive, cable-less backplane
design improves reliability and data integrity. The highly
scalable enclosure is currently available with up to eight 9GB or
18GB disk drives, providing up to 144GB of high performance storage
per enclosure. For maximum scalability, the CR8F supports 126
storage devices per loop and over 2TB of storage on a single
Arbitrated Loop (interconnecting 16 enclosures) to meet the storage
needs for mid-to-large-sized networks.
CR8DF List price range: $2,365-$20,127(a)
Designed for the storage-intensive digital-content creation market,
the CR8DF delivers scalable Fibre Channel-Arbitrated Loop
performance (up to 200MB/second). Featuring a 9-inch by 12-inch
desktop footprint, the high-performance JBOD 8-bay mini-tower
desktop storage enclosure features a cable-less, passive dual Fibre
Channel and support for up to eight 9GB or 18GB disk drives,
offering up to 144GB of desktop storage per enclosure. For maximum
scalability, the CR8DF supports 126 storage devices per loop and
over 2TB of storage. The CR8DF enclosure design includes
additional cooling and power capacity, and supports both the 7,200
RPM and 10,000 RPM disk drives.
CR8j List price range: $1,380-$19,052(a)
The CR8j is an 8-bay desktop enclosure that supports 4, 9 or 18GB
disk drives (up to 144GB). Positioned as a JBOD, the CR8j offers
Ultra/Wide SCSI-3 performance with data transfer rates up to 40
MB/per second.
thinStor 300 List price: $2,770
thinStor 300 is a more economical, desktop option which enables
storage devices such as CR8e and CR8j to attach to a network.
thinStor 300 offers up to 432GBs (144GB in a single enclosure) of
easily accessible RAID storage anywhere on the network. thinStor
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features a 200 MHz Pentium processor with 32MB of memory, dual
Ultra/Wide SCSI ports, an auto-sensing 10/100MB per second Ethernet
port connection, three enhanced security modes, and a printer port
for network printing. Multi-network client support includes
Windows 95/98, Windows NT, OS/2, WARP 4, NetPC, NC, and UNIX.
Multi-protocol support for TCP/IP, SMB, HTTP and NSF Version 2
enables concurrent transparent file sharing between UNIX and
Windows NT. thinStor also offers local tape backup capability and
supports most SCSI tape storage devices, Advanced Intelligent Tape
and Digital Linear Tape, either as single tape drives or tape
drives with stack (auto-loading) capabilities. A browser-based
configuration and management utility facilitates installation.
________
(a) The lower list price reflects an enclosure only; the
higher list price reflects an enclosure which contains the maximum
number of drives available for that enclosure. The Company offers
certain discounts for volume purchases.
Y2K Compliance
We have evaluated our existing products and policies as well as our
plans for future products to ensure that they are Year 2000
compliant. Any date-dependent software developed by our company
has been validated as being Year 2000 compliant using commercially
acceptable methods including:
Expanding year fields to four digits
Windowing
Date encoding techniques
In addition, other nStor products have been verified as Year 2000
compliant based on the absence of date dependencies in hardware,
software, and firmware code. Functional performance testing and
transitioning among critical dates have been used to confirm
compliance of these products.
Since our products may also incorporate hardware and software from
outside vendors, we are working closely with these vendors to
ensure Year 2000 compliance.
We believe that hardware, software, and firmware products
developed, manufactured, and distributed under the nStor name
accurately record, store, process and present calendar date data
from the 20th Century and into the 21st Century. However, if
additional non-nStor equipment is used with or connected to nStor
products, it is the user's responsibility to ensure that such
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equipment is Year 2000 compliant.
PROPRIETARY TECHNOLOGY
We rely upon patents, copyright and trademark protection, as well
as non-disclosure confidentiality agreements with employees and
customers, to establish, protect and preserve our proprietary
rights. We own the following trademarks and copyrights:
nStor
AdaptiveRAID
AdminiStor
Smart Cabinet
StorView
nTera
nVantage
DirectStor
For the life of your data
There can be no assurance that the steps taken to protect our
rights will be adequate to prevent misappropriation of our
technology or to preclude competitors from developing products with
features similar to our products. Although we believe our products
and other proprietary rights do not infringe the proprietary rights
of others, there can be no assurance that, in the future, third
parties will not assert infringement claims against us or with
respect to our products for which we have indemnification
obligations to certain of our customers. Asserting our rights or
defending against third-party claims could involve substantial
expense. In the event a third party were successful in a claim
that one of our products infringed the third party's proprietary
rights, we may have to pay substantial damages or royalties, remove
that product from the marketplace or expend substantial amounts in
order to modify the product so that it no longer infringes such
proprietary rights, any of which could have a material adverse
effect on our business.
SALES AND MARKETING
Our products are marketed and sold as alternatives to products
offered by server vendors, as part of a team-based sales strategy
utilizing traditional sales channels (OEM and distribution) and
territories. The sales process requires interaction with several
levels within a customer's organization, and the typical sales
cycle can range from three months to one year, depending on the
actual sales channel.
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OEM
OEM-grade products are primarily sold directly to OEM server
manufacturers for integration into their product offerings.
Generally, the OEM products are labeled under the OEM's brand name.
The OEM channel is significant in terms of revenue opportunity,
market visibility and credibility 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. We utilize a
multi-tiered sales and support structure to support and recruit
OEMs. This structure includes the sales organization as well as
the technical/product marketing, manufacturing and engineering
organizations. OEM sales accounted for 51% of our sales for the
year ended December 31, 1998.
In March 1999, we received the initial purchase order under a recently
established OEM relationship to supply high-performance RAID storage
enclosures to Silicon Graphics, Inc.(SGI), a major computer server manufact-
urer. The purchase order calls for us to ship approximately $5.8 million of
products to SGI commencing in the second quarter of 1999. The initial term
of the OEM arrangement is expected to be for three (3) years. A discontin-
uation or significant reduction of this relationship could have a material
adverse effect on our business.
Two OEM customers, Discreet Logic and Intergraph Corp., accounted
for 27% and 13%, respectively, of net sales for 1998 and 11% and
10%, respectively, for 1997. One customer, Intergraph Corp.,
accounted for 53% of net sales for the year ended October 31, 1996.
Distribution
Our nStor branded products are sold through a two-tier distribution
channel, arranged by specific geographical territories, each being
assigned a regional manager, multiple district managers as well as
an inside account manager (ISAM). To maximize our visibility within
each territory, regional and district managers are located within
their respective territories and are supported by corporate-based
ISAMs.
We seek to achieve greater territorial coverage by selectively
placing manufacturer's representatives in certain key areas such as
Washington, DC and Dallas, Texas. Managed by the territorial
district managers, manufacturer's representatives are selected
based on product focus, customer base and experience.
The sales model for product distribution in Europe, the
Asia/Pacific-Rim and Latin America is similar to the domestic
model, utilizing manufacturer's representatives.
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Each sales channel is supported by complementary pricing and margin
structures. This strategy allows us and our customers to
effectively sell and market our products across multiple channels
while still maintaining channel integrity. Distribution accounted
for 43% of our sales for the year ended December 31, 1998.
Our sales and marketing team consisted of 19 employees as of
December 31, 1998. Our sales organization recruits new OEM's,
distributors and resellers, supports existing resellers, markets
products to OEMs and system integrators and participates in trade
shows.
Our marketing plan utilizes a variety of programs to promote and
develop new and expanding markets for the nStor product line and
to support the sales strategy. The focal points of this plan
include development and promotion of the distribution channel,
strategic media placement, active regional, national and
international tradeshow participation, aggressive public relations,
web site innovation, and the development of highly focused
collateral material.
TECHNICAL SUPPORT AND CUSTOMER SERVICE
Total customer satisfaction is our attitude and philosophy toward
customer service. Through a sophisticated enterprise resource
planning software implementation, we provide support from order
entry to post sales service. Products are tracked through each
stage of engineering, manufacturing and distribution for the entire
life of a product, and our customer service department can view the
history of each individual system.
We believe that our ability to provide prompt and reliable
technical support has enhanced our marketing efforts. A toll-free
telephone number is provided for support to all OEM's, channel
partners (resellers and integrators) and end users. We employ an
engineering and support staff (26 people as of December 31, 1998)
who have extensive training and strive to work with all levels of
distribution and end users in order to satisfy our customers.
In addition, we provide a limited three-year warranty that 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, we have not experienced
material warranty claims; however, there can be no assurance that
warranty claims will not have a material adverse effect on our
future operating results.
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In 1998, we entered into an agreement with Alpha-MicroSystems to
introduce the nVantage on-site warranty service program for nStor
storage subsystems. nVantage consists of two on-site service
plans, each structured to provide the user with a different level
of on-site warranty service depending on individual site
requirements.
MANUFACTURING AND SUPPLIERS
Strategic Partners/Suppliers
Our products are assembled at a separate manufacturing facility in
Lake Mary, Florida, from components and prefabricated parts, such
as controllers, cabinets, multiple disk drives and power supplies,
manufactured and supplied by others. Strategic relationships have
been established with a number of suppliers to manage inventory,
including American Megatrends, Mylex, Chapperal, Seagate
Technologies, Quantum, IBM, Creative Design Solutions, Q-Logic,
Microsoft, Vitesse, and Symbios Logic.
We depend heavily on our suppliers to provide high quality
materials on a timely basis and at reasonable prices. Although
many of the components for our products are currently available
from numerous sources at competitive prices, certain of the
components used in our products are presently available from a
limited number of suppliers, or from a single supplier.
Furthermore, because of increased industry demand for many of those
components, their manufacturers may, from time to time, not be able
to make delivery of orders on a timely basis. In addition,
manufacturers of components on which we rely may choose, for
numerous reasons, not to continue to make those components, or the
next generation of those components, available to us.
We have no long-term supply contracts. There can be no assurance
that we will be able to obtain, on a timely basis, all of the
components we require. If we cannot obtain essential components as
required, we could be unable to meet demand for our products,
thereby materially adversely affecting our operating results and
allowing competitors to gain market share. In addition, scarcity
of such components could result in cost increases and adversely
affect our operating results.
Production and Delivery
The sophisticated nature of our products requires extensive testing
by skilled personnel. We utilize specialized testing equipment and
maintain an internal test-engineering group of three people to
provide this product support.
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ISO 9002 Certification
We are in the process of applying for ISO 9002 certification, an
internationally recognized Quality Assurance/Quality Control
standard that requires a defined process of procedures, forms and
work instructions that must be followed. There can be no
assurance, however, that we will meet the industry-accepted
standards necessary to obtain ISO 9002 certification.
BACKLOG
We manufacture our products based on a forecast of near-term demand
and maintain inventory in advance of receipt of firm orders from
customers. Shipments are generally made shortly after receipt of
a firm order. We have no long-term purchase commitments from our
customers and, in general, customers may cancel or reschedule
orders on 30 days notice with little or no penalty. As a result,
our backlog at any given time is not necessarily indicative of
future sales levels.
In March 1999, we received the initial purchase order under an EOM
agreement to supply high-performance RAID storage enclosures to a
major computer server manufacturer. The initial purchase order calls
for us to ship approximately $5.8 million of products to the server
manufacturer commencing in the second quarter of 1999.
There can be no assurance that orders from existing customers,
including our principal customers, will continue at their
historical levels, that we will be able to obtain orders from new
customers, or that existing customers, including our principal
customers, will not develop their own storage solutions internally
and as a result reduce or eliminate purchases. Loss of one or more
of our principal customers, or cancellation or rescheduling of
material orders already placed, could materially and adversely
affect our operating results.
RESEARCH AND DEVELOPMENT
The information storage industry is subject to rapid technological
change. Our ability to compete successfully is largely dependent
upon the timely development and introduction of products and our
ability to anticipate and respond to change. We use engineering
design teams that work with marketing managers, application
engineers and customers to develop products and product
enhancements. Computer I/O interface standards are maintained and
an extensive disk drive qualification program is in place to
monitor disk drives to ensure the quality and performance of the
disk drives integrated into our disk arrays. As part of our
15
<PAGE>
development strategy, we actively seek industry leaders with whom
we can initiate co-development activities in the hardware, software
and systems businesses.
In April 1998, we acquired Borg Adaptive Technologies, Inc. ("Borg"),
a privately owned company headquartered in Boulder, Colorado, and formed
a new engineering facility based in Boulder. Borg developed AdaptiveRAID
(see Current Product Offerings), which overcomes many of the shortcomings
and limitations of first-generation RAID technology by offering improved
disk array performance and greater ease-of-use features. The Boulder
facility is responsible for overseeing the design and implementation of
our line of next-generation RAID products utilizing the AdaptiveRAID
technology. We believe that the Borg acquisition will enable us to
differentiate our RAID products in the rapidly expanding, mid-range Windows
NT market. However, there can be no assurance that other companies may
not develop products with better performance and thus reduce demand for our
products, which could materially and adversely affect our operating results.
Research and development expenses during the year ended December
31, 1998 amounted to $2.6 million, all of which were expensed as
incurred. As of December 31, 1998, we had 26 full-time employees
engaged in research and development.
COMPETITION
The market for all levels of RAID subsystems is subject to intense
competition. We compete not only with other disk array
manufacturers, but also with manufacturers of proprietary,
integrated computer systems and system integrators which sell
computer systems containing general purpose RAID subsystems, some
of which may have significantly greater financial and technological
resources or larger distribution capabilities than we do.
Certain competitors may offer their products at lower sales prices
than we do; accordingly, we must often compete on the basis of
product quality, performance and reliability in specific
applications. Our continued ability to compete will largely depend
upon our ability to continue to develop high performance products
at competitive prices while continuing to provide superior
technical support and customer service.
EMPLOYEES
As of December 31, 1998, we employed 73 full-time employees, of
which 26 were involved in engineering, product development and
technical support, 19 in sales and marketing, 16 in manufacturing
and operations, and 12 in finance, management and administration.
16
<PAGE>
Our employees are not covered by a collective bargaining agreement,
there have been no work stoppages and we believe our employee
relations are good.
We also believe that our future success will largely depend upon
our ability to continue to attract, employ and retain competent
qualified technical, marketing and management personnel.
Experienced personnel are in great demand and we must compete with
other technology firms, some of which may offer more favorable
economic incentives to attract qualified personnel.
CERTAIN TRANSACTIONS AND RELATIONSHIPS
Hilcoast Advisory Services, Inc. ("Advisor")
From July 1, 1996 through October 31, 1997, we paid $6,000 per
month, plus reimbursement of out-of-pocket expenses, to Advisor for
certain financial consulting and administrative services provided
to us. H. Irwin Levy, Chairman of the Board of Directors and a
major stockholder of the Company, is the Chairman of the Board,
Chief Executive Officer and a majority shareholder of Advisor's
parent. We believe that the terms of this agreement were no less
favorable to us than those that would have been received from other
sources.
Intelligent Manufacturing Systems, Inc. ("IMS")
R. Daniel Smith, a former director and president of our company
("Mr. Smith"), was also the Chief Executive Officer and sole
shareholder of IMS, which specialized in providing software
solutions. In July 1996, we 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 our internal operation, sales and
marketing, service and engineering modules. In June 1997, we
acquired the assets of IMS for approximately $135,000 which was
based on the net book value of the assets acquired. We believe
that the terms of these transactions were no less favorable to us
than those that would be paid to other vendors.
Item 2. Properties
We lease approximately 40,000 square feet of office and warehouse
space in Lake Mary, Florida, under lease agreements for 22,000
square feet and 18,000 square feet, which expire in April 2000 and
February 2002, respectively, at present annual base rents of
approximately $149,000 and $119,000, respectively. The larger
facility accommodates our executive offices, administration and
17
<PAGE>
management, engineering, sales and marketing. The smaller facility
accommodates manufacturing and technical support.
We also lease 7,750 square feet of office space in Boulder,
Colorado under a lease which expires in 2001, at a present annual
base rent of $124,000. We believe our existing facilities are
adequate to meet our future needs.
Item 3. Legal Proceedings
In June 1996, Jack Ehrenhuas, Mark Schindler, Eugene Stricker,
Amnon Damty, Ehud Mendelson and Susan Felton filed a Complaint in
the Supreme Court of the State of New York, County of Nassau,
against us and, Michael Wise (presently a director and Vice
Chairman of the Board of Directors). The plaintiffs claim to have
contractual and proprietary interests in the prospect of a
transaction to purchase certain net assets we acquired (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 Mr.
Smith, IMS and the Company. In this action, the plaintiffs seek
compensatory damages plus punitive damages for alleged breach of
contract.
Both cases are currently in discovery. Our counsel believes that
we have good defenses to both claims and that we will not incur any
material liability. We are unaware of any facts that would support
any of the plaintiffs' claims and, accordingly, we believe that the
claims are without merit.
In June 1998, a Complaint was filed in the Supreme Court of the
State of New York by AIBC Investment Services Corp. ("AIBC")
claiming that our company and Mr. Smith breached an agreement with
AIBC in which AIBC was allegedly engaged as placement agent in
connection with raising funds for us. AIBC seeks damages of not
less than $262,500 plus interest, warrants to purchase our common
stock at a price to be determined and punitive damages. The case
is in the initial stages of discovery and we believe that the
claims are without merit and will not result in any material
liability.
From time to time, we are subject to legal proceedings and other
claims arising in the ordinary course of business. In our opinion,
we are not a party to any litigation, the outcome of which would
have a material adverse effect on our business or operations.
18
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
Effective November 17, 1998, stockholders holding approximately
9,600,000 shares of our common stock voted, by written consent, to
remove R. Daniel Smith as a Director of our company.
PART II
Item 5. Market for Our Common Equity and Related
Stockholder Matters
Our common stock commenced trading on the American Stock Exchange
("AMEX") in April 1997 under the symbol NSO. Prior to that time,
our common stock traded on the over-the-counter ("OTC") market
under the symbol NSTT. The following table sets forth the market
price range of our common stock for each quarter during the years
ended December 31, 1998 and 1997, based on the high and low closing
sales prices as reported by AMEX or the National Association of
Securities Dealers' Automated Quotation System. During that
period, we did not pay any dividends on the common stock and we do
not expect to pay any dividends in the near future. In addition,
our asset based revolving credit facility prohibits us from
declaring or paying cash dividends on any of our stock, other than
preferred stock.
Market Price Range
--------------------
1998 High Low
---- -------- --------
First quarter 2-1/16 1-9/16
Second quarter 1-9/16 1
Third quarter 7/8 3/8
Fourth quarter 2-5/8 7/16
1997
----
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
As of March 31, 1999, we had 21,492,258 shares of common stock
outstanding and approximately 1,728 holders of record of such
stock.
19
<PAGE>
Changes in Securities and Use of Proceeds
Effective April 14, 1998, we issued and sold in a private placement
to certain accredited investors a total of 3,500 shares (including
1,000 shares to H. Irwin Levy, Chairman of the Board of Directors
and a major stockholder - "Mr. Levy") of 8% Convertible Preferred
Stock, Series A (the "Series A Preferred Stock") at a purchase
price of $1,000 per share, resulting in gross proceeds to the
Company of $3.5 million. The shares of Series A Preferred Stock
were convertible into shares of our common stock at the lesser of
$1.44 per share or 77% of the market value of the common stock on
the date of conversion. In connection with the sale of the Series
A Preferred Stock, we issued warrants to purchase 280,000 shares
of our common stock (including 80,000 warrants to Mr. Levy)
exercisable at any time through April 2001 at an exercise price of
$1.50 per share.
On June 1, 1998, we created a new class of 8% Convertible
Preferred Stock, Series B (the "Series B Preferred Stock"), which
was identical to the Series A Preferred Stock with the single
exception that under certain limited circumstances, we could redeem
the Series B Preferred Stock for cash in the amount of 130% of the
purchase price of the Series B Preferred Stock.
On June 9, 1998, each holder of the Series A Preferred Stock
exchanged their shares of Series A Preferred Stock for an equal
number of shares of Series B Preferred Stock and, on June 12, 1998,
we filed a Certificate of Elimination with the Secretary of State
of Delaware to formally eliminate the Series A Preferred Stock.
On July 7, 1998, we borrowed $1 million from a private, accredited
investor under an 8% Convertible Subordinated Debenture (the
"Debenture") which matured on September 25, 1998, as extended. In
September 1998, the Debenture was converted into 1,667 shares of
a newly created Series A Preferred Stock with a stated value of
$600 per share. The Series A Preferred Stock accrues dividends at
8% per annum, payable quarterly, is convertible, commencing July 7,
1999 into shares of our common stock at a fixed conversion price of
$.60 per share and contains an automatic conversion feature in
which each share not converted as of July 7, 2000 automatically
converts into shares of our common stock.
On October 30, 1998, we redeemed $2.3 million of our Series B
Preferred Stock held by unrelated private investors for
approximately $2.5 million in cash (including a premium of $115,000
and accrued dividends of $102,000) and warrants to purchase 300,000
shares of our common stock, exercisable upon issuance at $1.00 per
share and expiring in October 2001. In conjunction with this
redemption, effective October 28, 1998, we issued 1,000 shares of
Series C Convertible Preferred Stock with a stated value of $1,000
per share (the "Series C Preferred Stock") in exchange for the
20
<PAGE>
remaining 1,000 shares of Series B Preferred Stock held by Mr.
Levy. The Series C Preferred Stock accrues dividends at 8% per
annum, payable quarterly, is convertible commencing July 7, 1999
into shares of our common stock at a fixed conversion price of
$1.00 per share and contains an automatic conversion feature in
which each share not converted as of July 7, 2000 automatically
converts into shares of our common stock.
During September and October 1998, we issued 2,000 additional
shares of Series C Preferred Stock to Mr. Levy, in satisfaction of
$2 million we owed to Mr. Levy.
In October 1998, we created 8% Convertible Preferred Stock, Series
D (the "Series D Preferred Stock") which accrues dividends at 8%
per annum, is convertible into shares of our common stock
commencing six months from the date of issue based on a fixed
conversion price of $1.00 per share and has an automatic conversion
feature for all shares not converted within three years from the
date of issue. Effective October 30, 1998, we issued and sold in
a private placement to certain accredited investors a total of
2,700 shares of Series D Preferred Stock at a purchase price of
$1,000 per share, resulting in gross proceeds to our company of
$2.7 million, of which approximately $2.5 million was used to
redeem $2.3 million of our Series B Preferred Stock, as discussed
above.
Item 6. Selected Financial Data
(dollars in thousands, except per share data)
The following table summarizes certain selected consolidated
financial data for our company for the year ended December 31, 1998
and 1997, for the two month transition period ended December 31,
1996, and for each of the years ended in the three year period
ended October 31, 1996. In November 1996, we changed our fiscal
year from October 31 to December 31, effective with the calendar
year beginning January 1, 1997.
Certain amounts for years prior to fiscal 1998 have been
reclassified to conform to the 1998 presentation. These
reclassifications had no impact on operating results previously
reported. The selected financial data has been derived from our
audited consolidated financial statements and is qualified by
reference to, and should be read in conjunction with, the
Consolidated Financial Statements and Notes thereto and
"Management's Discussion and Analysis of Financial Condition and
Results of Operations", included elsewhere in this report:
21
<PAGE>
Two Months
Year Ended Ended
December 31, December Year Ended October 31,
--------------------- 31, -------------------------------
1998 1997 1996 1996 1995 1994
---------- ---------- ---------- ---------- ---------- ---------
Sales $18,026 $26,244 $ 4,739 $ 5,619 $ - $ -
Gross profit 2,768 4,783 1,348 2,072 - -
Net income
(loss) (10,407) (7,886) (43) 12,798(1) (61) (272)
Net income
(loss)
applicable
to common
stock (11,888) (7,886) (43) 12,798(1) (61) (272)
Basic and
diluted net
income
(loss) per
common share (.63) (.42) (.00) .73 (.00) .02
Average
number of
common
shares out-
standing 18,888,911 18,670,477 18,670,477 17,606,477 17,600,477 17,600,477
At end of
period:
Working
capital
(deficit) $ 2,087 ($ 1,434) $5,852 $11,045 $11,408 ($586)
Total assets 14,128 16,762 20,067 15,677 12,054 26
Long-term
debt 7,043 1,504 516 510 476 444
Shareholders'
equity
(deficit) 3,150 5,037 12,817 12,390 10,932 (1,030)
- ----------
(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) (see
Note 7 to Consolidated Financial Statements).
22
<PAGE>
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Forward Looking Statements
With the exception of the discussion regarding historical information,
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" and other discussions elsewhere in this Form
10-K contain forward looking statements. Such statements are based
on current expectations subject to uncertainties and other factors
which may involve known and unknown risks that could cause actual
results of operations to differ materially from those projected or
implied. Further, certain forward looking statements are based
upon assumptions about future events which may not prove to be accurate.
Risks and uncertainties inherent in forward looking statements
include, but are not limited to, our future cash flows and ability
to obtain sufficient financing, timing and volume of sales orders,
level of gross margins and operating expenses, lack of market
acceptance of our new product lines, price competition, conditions
in the technology industry and the economy in general, our
customers and vendors ability to achieve year 2000 functionality, as
well as legal proceedings. The economic risk associated with
materials cost fluctuations and inventory obsolescence is
significant to our company. The ability to manage our inventories
through procurement and utilization of component materials could
have a significant impact on future results of operations or
financial condition. Historical results are not necessarily
indicative of the operating results for any future period.
Subsequent written and oral forward looking statements attributable
to our company or persons acting on our behalf are expressly
qualified in their entirety by cautionary statements in this Form
10-K and in other reports we filed with the Securities and Exchange
Commission. The following discussion should be read in conjunction
with the Consolidated Financial Statements and the Notes thereto
included elsewhere in this filing.
Overview
We are engaged as a manufacturer and supplier of high-performance
information storage solutions, including external RAID (Redundant
Array of Independent Discs) subsystems, Network Attached Storage,
data storage enclosures, storage management software solutions and
AdaptiveRAID technology. We design, manufacture and sell high
performance fault tolerant data storage solutions supporting a
variety of operating system environments for a wide range of
customer requirements.
23
<PAGE>
Our company has grown through several acquisitions (see Note 2 to
Consolidated Financial Statements), the first of which occurred in
June 1996 when we acquired the RAID business from Seagate
Peripherals, Inc. In December 1996, we acquired substantially all
the net assets of Parity Systems, Inc. (the "Parity Acquisition").
In April 1998, we acquired Borg Adaptive Technologies, Inc.
("Borg"). 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 owners. 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, our only assets were
securities issued by IMNET Systems, Inc. ("IMNET" - see Note 3 to
Consolidated Financial Statements), which we had acquired in
October 1992 in exchange for substantially all of the Company's
operating assets. During the time in which we owned the IMNET
securities, our only activities consisted of monitoring our
investment in IMNET and evaluating potential business
opportunities.
As a result of declining sales during 1998, we undertook an
initiative to eliminate positions no longer needed and to increase
operating efficiencies. This strategy resulted in significant
workforce reductions, a realignment of certain operating expenses
and the elimination of certain less profitable products. As a
result, in July 1998 we announced that we would focus on our core
storage technology and executed an orderly transition to phase out
all non-storage related businesses, including our memory division.
Effective October 1, 1998, we sold to an unrelated party our
integrated systems division which installed and supported
enterprise resource planning manufacturing software for a net sales
price of $111,000.
Results of Operations
The following table sets forth, for the periods indicated, certain
operating data as a percentage of sales.
24
<PAGE>
Year Ended Two Months
December 31, Ended Year Ended
------------------ December 31, October 31,
1998 1997 1996 1996
-------- -------- ----------- -----------
Sales 100% 100% 100% 100%
Cost of sales 85 82 72 63
---- ---- ---- ----
Gross profit 15 18 28 37
Selling, general and
administrative 46 34 23 21
Research and
development 14 10 6 13
Depreciation and
amortization 8 3 1 1
---- ---- ---- ----
Income (loss) from
operations (53) (29) (2) 2
Interest expense
(income) net 5 - (1) (3)
---- ---- ---- ----
Income (loss) before
income taxes (58%) (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.
Comparison of Fiscal Years Ended December 31, 1998
and December 31, 1997
The Company reported a net loss applicable to common stock of $11.9
million for the year ended December 31, 1998 as compared to a net
loss of $7.9 million from the year ended December 31, 1997.
Sales
Sales for the year ended December 31, 1998 were $18 million as
compared to $26.2 million during the preceding year, a decrease of
$8.2 million or 31%. Factors contributing to this sales decline
included: (i) delays in customer deliveries and in some cases,
missed sales orders in early 1998, caused by our inability to meet
customer production schedules brought about by our cash flow
difficulties at that time; (ii) lost sales opportunities while
reorganizing and training our sales force under new executive sales
management; and (iii) entering 1998 with a significantly lower
balance of sales orders than were in place as of the beginning of
1997. Another significant factor was a $3.8 million decrease in
non-storage related product sales, including memory products and
enterprise resource planning manufacturing software ("Software"),
25
<PAGE>
as a result of our decision to phase out our non-storage related
businesses. The following table sets forth sales by product type
(in thousands):
1998 1997
------- -------
Storage $16,439 $20,856
Memory 511 2,930
Software 1,076 2,458
------- -------
$18,026 $26,244
======= =======
Our company's sales growth in 1999 is dependent on our ability to
develop and market new products, expand the applications of
existing products into targeted market sectors and expand our sales
distribution channels through the addition of new distributors,
value added resellers and manufacturers sales representatives.
Cost of Sales/Gross Profit
Gross profit decreased to 15% for the year ended December 31, 1998,
as compared to 18% for the previous year. Our gross profit is
dependent, in part, on product mix which fluctuates from time to
time. The decline in gross profit is primarily due to a decreased
sales level of products with overall higher margins and certain
cash flow difficulties which limited our ability to purchase
products in the most cost efficient manner. Excluding additions to
inventory reserves, the overall gross profit for 1998 would have
been 23% as compared to 24% for 1997. We expect our gross profits
to improve during 1999 partially due to the elimination of certain
products with lower gross profits.
Operating Expenses
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $8.3 million (46%
of sales) and $8.9 million (34% of sales) for the year ended
December 31, 1998 and 1997, respectively. The $.6 million decrease
is principally attributable to overall reduced spending levels
resulting from planned cost reductions, primarily advertising and
travel, which were implemented as a result of the lower sales
levels. Selling, general and administrative costs as a percentage
of sales increased 12% during 1998 principally attributable to the
level of certain fixed costs we incurred while sales levels
declined.
26
<PAGE>
We do 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.
Research and Development
Research and development expenses were $2.6 million for the year
ended December 31, 1998 and remained relatively unchanged from the
preceding year. Certain of these expenses decreased as a result of
the continued integration of previously acquired engineering
activities. This decrease was offset by increased engineering
staffing and related overhead of $.6 million resulting from the
Borg acquisition in April 1998, and increased project costs in
connection with the development of new products. We believe that
considerable investments in research and development will be
required to remain competitive and expect that these expenses will
increase in future periods.
Research and development costs are expensed as incurred and may
fluctuate considerably from time to time depending on a variety of
factors. These costs are substantially incurred in advance of
related sales, or in certain situations, may not ultimately
generate sales.
Depreciation and Amortization
Depreciation and amortization increased $.6 million for the year
ended December 31, 1998 as compared to 1997, primarily due to
additions to test equipment and computer software.
Interest Expense
Interest expense in 1998 increased $.7 million over 1997 as a
result of a significant increase in net average borrowings and the
amortization of loan costs in connection with certain indebtedness
(see Note 6 to Consolidated Financial Statements).
Preferred Stock Dividends
In March 1997, the Securities and Exchange Commission Staff (the
"Staff") announced its position on accounting for preferred stock
which is convertible into common stock at a discount from the
market rate at the date of issuance. The Staff indicated that a
preferred stock dividend attributable to such a beneficial
conversion privilege should be recorded for the difference between
the conversion price and the quoted market price of common stock at
27
<PAGE>
the date of issuance. Accordingly, during 1998 we recorded
$1,218,000 as an embedded dividend attributable to the beneficial
conversion privilege, including $1,045,000 on our Series B
Convertible Preferred Stock and $173,000 on our Series A
Convertible Preferred Stock (see Note 10 to Consolidated Financial
Statements).
In addition, for the year ended December 31, 1998, all classes of
our convertible preferred stock required cumulative dividends at 8%
and aggregated $263,000. Absent significant conversions to common
stock, such dividends are expected to increase as a result of a
full twelve months dividends in 1999 on certain classes that were
issued in September and October 1998.
Comparison of Fiscal Years Ended December 31, 1997
and October 31, 1996
We 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, we 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 our
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
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
our initial acquisition of the RAID Business in June 1996, there
were no sales reported by our company. Accordingly, the year ended
October 31, 1996 included sales for the initial five months of
operation of the RAID Business and does not include sales generated
from the Parity Acquisition effective December 1, 1996. Sales for
the two month transition period amounted to $4.7 million and
included only one month of sales resulting from our company's
Parity Acquisition.
Sales levels were adversely affected during 1997 by delays in
completing the integration of our new product CR8e RAID subsystem.
We were dependent upon the development of a third party controller
product that was delivered to us more than six months late which
resulted in reduced sales volume and pricing for our CR8e
subsystem. We also suffered disruptions in manufacturing
associated with the transfer and integration of production from
California to Florida after the Parity Acquisition.
28
<PAGE>
Cost of Sales/Gross Profit
Gross profit for the year ended December 31, 1997 decreased to 18%
from 37% for the year ended October 31, 1996. Gross profit for the
two month transition period ended December 31, 1996 was at 28%.
Our gross profit is dependent, in part, on product mix which will
fluctuate from time to time. Reduced gross profit for 1997 is
primarily the result of an approximate $2.9 million write-down of
inventory resulting from our revaluation of certain inventory
acquired in the Parity Acquisition, potential obsolete inventory,
transitional issues associated with the implementation of a new
materials requirement planning system, lower sales volume and sales
prices for our storage subsystems and overall lower margins from
the sale of our memory products.
Selling, General and Administrative Expenses
Selling, general and administrative costs for the year ended
December 31, 1997 increased to $8.9 million (34% of sales) from
$1.2 million (21% of sales) for the year ended in October 31,
1996. This increase was primarily the result of twelve months of
operations in 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.
Research and Development
Research and development expenses for the year ended December 31,
1997 amounted to $2.6 million, representing 10% of sales as
compared to the year ended October 31, 1996 when expenses were $.7
million or 13% of sales.
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 our anticipated future growth.
Depreciation and Amortization
Depreciation and amortization increased to $.8 million for the year
ended December 31, 1997 from $.1 million for the year ended October
31, 1996, principally due to only five months of expense included
in 1996.
29
<PAGE>
Liquidity and Capital Resources
Consolidated Statements of Cash Flows
Operating Activities
Net cash used by operating activities amounted to $10.5 million and
$6.3 million for the years ended December 31, 1998 and 1997,
respectively. The most significant use of cash for both fiscal
years was our loss from operations (before changes in assets and
liabilities) of $6.7 million in 1998 and $4.9 million in 1997. In
addition, net cash was used by a $3.5 million decrease in our
accounts payable and other liabilities in 1998 and a $1.9 million
increase in our inventories in 1997.
Investing Activities
Net cash used by investing activities for the years ended December
31, 1998 and 1997 amounted to $.8 million and $1.5 million,
respectively, primarily resulting from additional investments in
property and equipment. Cash used by investing activities for
acquisitions for the year ended December 31, 1998, the two month
transition period ended December 31, 1996 and the year ended
October 31, 1996 amounted to $.4 million, $2.8 million and $.6
million, respectively. In addition, during the year ended October
31, 1996, we received approximately $12 million cash from the sale
of our IMNET Systems, Inc. stock (see Note 3 to Consolidated
Financial Statements).
Financing Activities
Net cash provided by financing activities for 1998 amounted to
approximately $11.4 million, and primarily consisted of net
borrowings of $5.9 million (including $3 million subsequently
converted into Convertible Preferred Stock), $3.5 million of net
proceeds from the issuance of convertible preferred stock (net of
$2.4 million we used to redeem a prior issuance of convertible
preferred stock) and $1.7 million from the exercise of stock
warrants. Net cash provided by financing activities for 1997
amounted to $3.2 million, consisting of $4.2 million in borrowings,
less $1 million used as restricted cash under borrowings. For
the two month transition period ended December 31, 1996, net cash
provided by financing activities amounted to $2.7 million
principally from the repayment of borrowings in connection with our
Parity Acquisition.
30
<PAGE>
Asset Based Credit Facilities
In May 1997, we obtained an asset based revolving bank credit
facility (the "Revolver"), under which we could borrow up to $7
million. Subsequently, we were not consistently 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 June 30, 1998 with gradual reductions to $2.4
million thereafter until maturity on July 31, 1998. The Revolver
was collateralized by substantially all of our assets, including
approximately $1 million reflected as Restricted Cash at December
31, 1997.
On August 3, 1998, we repaid the Revolver with a replacement asset
based revolving credit facility (the "New Revolver") which provides
for borrowings based on the lesser of $5 million or 80% of the
Company's eligible accounts receivable, as defined. The New
Revolver bears interest, payable monthly, based on prime plus 2%
(9-3/4% at December 31, 1998), is guaranteed by our company and
matures on August 3, 2000. We pay a facility fee equal to 1% per
annum on the total facility of $5 million. Advances under the New
Revolver are collateralized by substantially all of our assets,
including $.5 million reflected as Restricted Cash at December 31,
1998. The loan agreement provides for certain financial covenants
including current ratio and net worth requirements, limitations on
operating losses and restrictions on the incurrence of additional
debt, capital expenditures and the payment of dividends, other than
preferred stock dividends. At December 31, 1998, we were not in
compliance with the financial covenant concerning our operating losses
for 1998; however, effective February 4, 1999, the lender agreed to
forbear declaring a default.
Financing Activities With Private Investors
In late 1997, we determined that amounts available under the
Revolver would not be sufficient to satisfy our cash requirements
and, therefore, additional debt and/or equity financing would be
necessary. Subsequently, through December 31, 1998, we obtained
net cash proceeds of $13.5 million ($1 million in 1997 and $12.5
million in 1998) from private investors, consisting of $3.5 million
of 8% Convertible Preferred Stock (net of $2.4 million used to
redeem a prior issuance of 8% Convertible Preferred Stock - see
Note 10 to Consolidated Financial Statements), $3 million which was
initially in the form of debt and subsequently converted to 8%
Convertible Preferred Stock, $5.3 million of net borrowings,
principally 10% subordinated loans (the "Subordinated Loans" - see
Note 6 to Consolidated Financial Statements), which mature on
September 5, 2000, and $1.7 million received from the exercise of
stock warrants.
31
<PAGE>
Of these amounts, as of December 31, 1998, H. Irwin Levy, Chairman
of the Board of Directors and a principal stockholder, and a
privately owned corporation controlled by Mr. Levy (collectively,
"Mr. Levy") held $3 million of 8% Convertible Preferred Stock, $1
million of Subordinated Loans (net of $1 million sold by Mr. Levy
as participation interests) and $300,000 of short-term loans which
were repaid in February 1999. In addition, in December 1998 we
received approximately $400,000 when Mr. Levy exercised warrants to
purchase 333,332 shares of our common stock. Through December 31,
1998, Mr. Levy also advanced an additional $3.4 million, which we
repaid by December 31, 1998.
Pursuant to a Promissory Note, dated March 1, 1999, Mr. Levy has
agreed to loan us up to an additional $1 million through September
30, 1999. From March 1, 1999 through March 31, 1999, we have
borrowed an additional $790,000 under that Note. In addition, in
February and March 1999, we borrowed $2.3 million from three
unrelated private investors, of which $1.8 million matures in
September 2000 and $500,000 in June 1999. We also received
approximately $1.6 million from the exercise of warrants and
options to purchase 978,833 shares of our common stock. In April
1999, we issued 500,000 shares of newly issued common stock to an
unrelated private investor for $1 million.
We believe that amounts expected to be available under lending
arrangements with financial instiutions, from the proceeds received
from issuance of common stock and from Mr. Levy will be sufficient to
satisfy our working capital needs during 1999, as presently contemplated.
There can be no assurance, however, that we may not require additional
capital beyond our current forecasted needs nor that any such additional
required funds would be available on terms acceptable to us, if at all,
at such time or times as required by us.
Recent Development
In March 1999, we entered into an agreement to purchase 75% of the
outstanding common stock of Andataco, Inc. ("Andataco") from its
principal stockholder, David Sykes. That agreement also contemplates
we would purchase from Mr. Sykes a note in the principal amount of
$5,196,000, issued to him by Andataco. Following the purchase of Mr. Sykes'
shares, he would continue to serve as President of Andataco, pursuant to a
proposed three-year employment agreement. The purchase is contingent on
our raising the capital necessary to fund the acquisition. If the
transaction is completed, it would be our intention to acquire the remaining
Andataco shares as soon as possible following an independent professional
determination of the fair value of such shares.
32
<PAGE>
We are currently negotiating with unrelated private investors to obtain
approximately $15 million in a private placement of convertible preferred
stock (the "Private Placement"). Proceeds from the Private Placement would
be used to finance the proposed Andataco acquisition, if consummated, and
to provide additional working capital for our company. There can be no
assurance, however, that we will be successful in obtaining the funds
necessary to finance the proposed acquisition nor that the acquisition will
be completed.
Effect of Inflation
During recent years, inflation has not had an impact on our operations
and we do not expect that it will have a material impact in 1999.
Recently Issued Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No.133, "Accounting for
Derivative Instruments and Hedging Activities" (SFAS 133). SFAS
133 requires companies to recognize all derivative contracts as
either assets or liabilities in the balance sheet and to measure
them at fair value. SFAS 133 is effective for periods beginning
after June 15, 1999. Historically, we have not entered into
derivative contracts. Accordingly, the adoption of this
pronouncement is not expected to have a material impact on our
financial statements or disclosures.
Year 2000 Issue
As many computer systems, software programs and other equipment
with embedded chips or processors (collectively, "Information
Systems") use only two digits rather than four to define the
applicable year, they may be unable to process accurately certain
data, during or after the year 2000. As a result, business and
governmental entities are at risk for possible miscalculations or
systems failures causing disruptions in their business operations.
This is commonly known as the Year 2000 ("Y2K") issue. The Y2K
issue concerns not only Information Systems used solely within a
company but also concerns third parties, such as customers, vendors
and creditors, using Information Systems that may interact with or
affect a company's operations.
33
<PAGE>
The Company's State of Readiness
We have implemented a Y2K readiness program with the objective of
having all of our significant Information Systems functioning
properly with respect to Y2K before January 1, 2000. The first
component of our readiness program was to identify our internal
Information Systems that are susceptible to system failures or
processing errors as a result of the Y2K issue. This effort is
substantially complete and no material issues requiring remediation
or replacement have been identified. The review of our financial
systems has been completed and no issues have been identified.
As to the second component of the Y2K readiness program, we intend
to identify our significant customers, vendors and creditors that
are believed, at this time, to be critical to business operations
subsequent to January 1, 2000. We expect to reasonably ascertain
their respective stages of Y2K readiness through the use of
questionnaires, interviews and other available means. We will take
appropriate action based on those responses, but there can be no
assurance that the Information Systems provided by or utilized by
other companies which affect their operations will be timely
converted in such a way as to allow them to continue normal
business operations or furnish products, services or data to us
without disruption.
Risks
If needed remediations and conversions to the Information Systems
are not made on a timely basis by our materially-significant
customers or vendors, we could be affected by business disruption,
operational problems, financial loss, legal liability to third
parties and similar risks, any of which could have a material
adverse effect on our operations, liquidity or financial condition.
Factors which could cause material differences in results, many of
which are outside our control, include, but are not limited to, the
accuracy of representations by manufacturers of our Information
Systems that their products are Y2K complaint, the ability of our
customers and vendors to identify and resolve their own Y2K issues
and our ability to respond to unforeseen Y2K complications.
Y2K Costs
Our total cost of these Y2K compliance activities has not been and
is not anticipated to be material to our business, results of
operations or financial condition. The costs and time necessary to
complete the Y2K modification and testing processes are based on
management's best estimates, which were derived utilizing numerous
assumptions of future events including the continued availability
of certain resources, third party modification plans and other
factors. However, there can be no assurance that these estimates
will be achieved and actual results could differ from the
34
<PAGE>
estimates. Our Y2K readiness program is an ongoing process and the
estimates of costs and completion dates for various components of
the Y2K readiness program described above are subject to change.
Item 8. Financial Statements and Supplementary Data
Table of Contents to Consolidated Financial Statements
Page
Report of Independent Certified Public Accounts 36
Consolidated Financial Statements:
Balance sheets - December 31, 1998 and 1997 37
Statements of Operations - Year Ended
December 31, 1998 and 1997, Two Months
Ended December 31, 1996, and Year Ended
October 31, 1996 38
Statements of Comprehensive Income -
Year Ended December 31, 1998 and 1997,
Two Months Ended December 31, 1996 and
Year Ended October 31, 1996 39
Statements of Stockholders' Equity - Year Ended
December 31, 1998 and 1997, Two Months
Ended December 31, 1996, and Year Ended
October 31, 1996 40-41
Statements of Cash Flows - Year Ended
December 31, 1998 and 1997, Two Months
Ended December 31, 1996, and Year Ended
October 31, 1996 42-43
Notes to Consolidated Financial Statements 44-63
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.
35
<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, 1998
and 1997, and the related consolidated statements of operations,
comprehensive income, stockholders' equity and cash flows for the
years ended December 31, 1998 and 1997, October 31, 1996, 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, 1998 and 1997 and the results of their operations and
their cash flows for the years ended December 31, 1998 and 1997,
October 31, 1996 and for the two months ended December 31, 1996, in
conformity with generally accepted accounting principles.
BDO SEIDMAN, LLP
Orlando, Florida
March 5, 1999, except
for Note 15, which is
as of April 15, 1999
36
<PAGE>
nStor TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
=========================================
(dollars in thousands)
December 31,
-----------------
ASSETS (Note 6) 1998 1997
--------------- ------- -------
Current assets:
Cash and cash equivalents:
Restricted $ 21 $ 1,024
Unrestricted 147 61
Accounts receivable (Note 4) 2,462 3,863
Inventories (Note 4) 3,028 3,577
Prepaid expenses and other 364 262
------- -------
Total current assets 6,022 8,787
Restricted cash (Note 6) 500 -
Property and equipment, net of $1,251 and
$457 accumulated depreciation (Note 4) 1,653 2,060
Goodwill and other intangible assets, net of
$939 and $470 accumulated amortization (Note 4) 5,953 5,915
------- -------
$14,128 $16,762
LIABILITIES ======= =======
-----------
Current liabilities:
Borrowings (Note 6) $ 500 $ 3,445
Accounts payable and other 3,435 6,776
------- -------
Total current liabilities 3,935 10,221
Long-term debt (Note 6) 7,043 1,504
------- -------
Total liabilities 10,978 11,725
------- -------
Commitments, contingencies and subsequent
events (Notes 9, 13 and 15)
SHAREHOLDERS' EQUITY (Notes 2, 6, 10, 11 and 15)
------------------------------------------------
Preferred stock, $.01 par; shares authorized 1,000,000;
shares issued and outstanding at December 31, 1998 -
Series A, Convertible Preferred Stock, 1,667;
Series C, Convertible Preferred Stock, 3,000;
Series D, Convertible Preferred Stock, 2,700;
none outstanding at December 31, 1997 - -
Common stock, $.05 par; shares authorized
40,000,000; 20,515,425 and 18,670,477 shares
issued and outstanding at December 31, 1998
and December 31, 1997, respectively 1,025 934
Additional paid-in capital 40,409 30,499
Deficit (38,284) (26,396)
------- -------
Total shareholders' equity 3,150 5,037
------- -------
$14,128 $16,762
======= =======
See accompanying notes to consolidated financial statements.
37
<PAGE>
nStor TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
=========================================
(dollars in thousands, except per share data)
Two
Year Ended Months Year
December 31, Ended Ended
------------------ December October
1998 1997 31, 1996 31, 1996
-------- -------- -------- --------
Sales (Note 8) $18,026 $26,244 $ 4,739 $ 5,619
Cost of sales 15,258 21,461 3,391 3,547
------- ------- ------- -------
Gross profit 2,768 4,783 1,348 2,072
------- ------- ------- -------
Operating expenses:
Selling, general and administrative 8,335 8,909 1,081 1,188
Research and development 2,572 2,618 293 701
Depreciation and amortization 1,352 777 79 68
------- ------- ------- -------
Total operating expenses 12,259 12,304 1,453 1,957
------- ------- ------- -------
Income (loss) from operations (9,491) (7,521) (105) 115
Gain from sale of IMNET Systems, Inc.
stock (Note 3) - - - 11,955
Interest income 71 120 87 234
Interest expense (987) (247) (25) (72)
------- ------- ------ -------
Income (loss) before income taxes
and extraordinary gain (10,407) (7,648) (43) 12,232
Extraordinary gain from debt
extinguishment (Note 7) - - - 566
------- ------- ------ -------
Income (loss) before income taxes (10,407) (7,648) (43) 12,798
Income tax expense (Note 5) - (238) - -
------- ------- ------ -------
Net income (loss) (10,407) (7,886) (43) 12,798
Preferred stock dividends (263) - - -
Embedded dividend attributable to
beneficial conversion privilege
of Convertible Preferred Stock
(Note 10) (1,218) - - -
------- ------- ------ -------
Net income (loss) applicable to
common stock ($11,888) ($ 7,886) ($ 43) $12,798
======= ======= ====== =======
Basic and diluted net income (loss)
per common share:
Income (loss) before extra-
ordinary gain ($ .63) ($ .42) ($ .00) $ .70
Extraordinary gain - - - .03
------- ------- ------ -------
Net income (loss) per common share ($ .63) ($ .42) ($ .00) $ .73
======= ======= ====== =======
Average number of common shares
outstanding, basic and diluted 18,888,911 18,670,477 18,670,477 17,606,477
========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
38
<PAGE>
nSTOR TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
===============================================
(dollars in thousands)
Two
Year Ended Months Year
December 31, Ended Ended
------------------ December October
1998 1997 31, 1996 31, 1996
-------- -------- -------- --------
Net income (loss) ($10,407) ($7,886) ($43) $12,798
Other comprehensive income:
Unrealized gain on securities
held for sale (Note 3) - - - (12,023)
-------- -------- --- -------
Comprehensive income (loss) ($10,407) ($7,886) ($43) $ 775
======== ======== === =======
See accompanying notes to consolidated financial statements.
39
<PAGE>
nSTOR TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(NOTES 2, 6, 10 and 14)
===============================================
(dollars in thousands)
<TABLE>
<CAPTION> Net
Unrealized
Preferred Addi- Gain on
Common Stock Stock tional Securities
----------------- ------------- Paid-in Available
Shares Amount Shares Amount Capital For Sale Deficit Total
---------- ------ ------ ------ -------- --------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, October
31, 1995 17,600,477 $ 880 - - $29,294 $12,023 ($31,265) $10,932
Change in net unrealized
gain on securities
available for sale (12,023) (12,023)
Issuance of common stock
in connection 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 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
Common stock options
granted to outside
directors 66 61
Common stock warrants
issued in connection
with borrowings 45 45
Net loss for the year
ended December 31, 1997 (7,886) (7,886)
---------- ------ ----- ------ ------- ------- ------- ------
Balances, December
31, 1997 18,670,477 934 - - 30,499 - (26,396) 5,037
Issuance of Convertible
Preferred Stock in
private placements:
Series B, less $262
of issuance cost 3,500 - 3,238 3,238
Series D, less $10
of issuance cost 2,700 - 2,690 2,690
</TABLE>
40
<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
Preferred Addi- Gain on
Common Stock Stock tional Securities
----------------- ------------- Paid-in Available
Shares Amount Shares Amount Capital For Sale Deficit Total
---------- ------ ------ ------ -------- --------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of Convertible
Preferred Stock in
satisfaction of borrowings:
Series A, less $5
of issuance cost 1,667 - 995 995
Series C, less $4
of issuance cost (a) 2,000 - 1,996 1,996
Redemption of Convertible
Preferred Stock, Series B,
including $120 of
redemption costs (a) (2,300) - (2,420) (2,420)
Issuance of common stock
in connection with:
Conversion of Series B
Convertible Preferred
Stock 394,949 18 (200) - (18) -
Exercise of warrants 1,449,999 73 1,602 1,675
Preferred stock
dividends (263) (263)
Embedded dividend attri-
butable to beneficial
conversion privilege
of Convertible
Preferred Stock:
Series B 1,045 (1,045) -
Series A 173 (173) -
Common stock warrants
issued in connection
with:
Long-term debt 427 427
Acquisition 148 148
Common stock options
granted to outside
directors 34 34
Net loss for the year
ended December 31, 1998 (10,407) (10,407)
---------- ------ ----- ------ ------- ------- ------- -------
Balances, December
31, 1998 20,515,425 $1,025 7,367 - $40,409 $ - ($38,284) $ 3,150
========== ====== ===== ====== ======= ======= ======= =======
</TABLE>
__________
(a) In connection with the redemption of Series B Convertible Preferred
Stock, $1 million of the remaining Series B was exchanged for Series C
Convertible Preferred Stock. At December 31, 1998 there were 3,000
shares outstanding of Series C Convertible Preferred Stock with an
aggregate stated value of $3 million.
See accompanying notes to consolidated financial statements.
41
<PAGE>
nSTOR TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Note 2)
=====================================
(in thousands) Two
Year Ended Months Year
December 31, Ended Ended
------------------ December October
1998 1997 1996 1996
CASH FLOWS FROM OPERATING -------- -------- -------- --------
ACTIVITIES:
Net income (loss) ($10,407) ($ 7,886) ($ 43) $12,798
Adjustments to reconcile net income
(loss) to net cash used by
operating activities:
Gain from sale of IMNET Systems,
Inc. stock - - - (11,955)
Extraordinary gain from debt
extinguishment - - - (566)
Depreciation and amortization 1,352 777 79 68
Provision for inventory
obsolescence 1,354 1,450 - 118
Provision for uncollectible
accounts receivable 837 522 - -
Amortization of deferred
compensation 44 40 - -
Amortization of deferred
loan costs 140 27 - -
Deferred income taxes - 182 - (182)
Minority interest in net income
of consolidated subsidiary - - - 26
Changes in assets and lia-
bilities, net of effects
from acquisition:
Decrease (increase) in
accounts receivable 564 338 (442) (1,731)
Increase in inventories (805) (1,912) (189) (509)
Increase in prepaid expenses
and other (112) (94) (23) (82)
(Decrease) increase in
accounts payable and
other liabilities (3,453) 242 452 1,574
------- ------- ------- -------
Net cash used by operating activities (10,486) (6,314) (166) (441)
------- ------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net proceeds from sale of
IMNET Systems, Inc. stock - - - 11,955
Cash paid for acquisitions (379) - (2,800) (592)
Additions to property and equipment (456) (1,453) (323) (314)
------- ------- ------- -------
Net cash (used) provided by
investing activities (835) (1,453) (3,123) 11,049
------- ------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (repayments) proceeds from
revolving bank credit facility (1,507) 3,245 (2,700) -
Additions to other borrowings 10,803 988
Repayments on other borrowings (3,424) - - -
Issuance of Convertible Preferred
Stock in private placements 5,928 - - -
Redemption of Convertible
Preferred Stock (2,420) - - -
42
<PAGE>
nSTOR TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Note 2)
=====================================
(in thousands)
(concluded) Two
Year Ended Months Year
December 31, Ended Ended
------------------ December October
1998 1997 31, 1996 31, 1996
-------- -------- -------- --------
Proceeds from exercise of stock
warrants 1,675 - - 60
Decrease (increase) in restricted
cash and cash equivalents 503 (1,024) - -
Cash paid for preferred stock
dividends (151) - - -
Cash paid for debt extinguishment - - - (75)
------- ------- ------- -------
Net cash provided (used) by
financing activities 11,407 3,209 (2,700) (15)
------- ------- ------- -------
Net increase (decrease) in
unrestricted cash and cash
equivalents during the year 86 (4,558) (5,989) 10,593
Unrestricted cash and cash equiva-
lents at beginning of period 61 4,619 10,608 15
------- ------- ------- -------
Unrestricted cash and cash equiva-
lents at end of period $ 147 $ 61 $ 4,619 $10,608
======= ======= ======= =======
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Cash paid during period for:
Interest $ 807 $ 140 $ - $ -
======= ======= ======= =======
Income taxes $ 3 $ 238 $ - $ -
======= ======= ======= =======
NON-CASH INVESTING ACTIVITIES:
Acquisitions (Note 2):
Fair value of assets acquired $ 527 $ - $10,073 $ 1,856
Liabilities assumed - - (4,103) (664)
Borrowings repaid at closing - - (2,700) -
Common stock issued - - - (600)
Warrant issued to seller (148) - (470) -
------- ------- ------- -------
Cash paid $ 379 $ - $ 2,800 $ 592
======= ======= ======= =======
NON-CASH FINANCING ACTIVITIES (Note 10):
Embedded dividend attributable to
beneficial conversion privilege
of Convertible Preferred Stock:
Series B $ 1,045 $ - $ - $ -
Series A 173 - - -
------- ------- ------- -------
$ 1,218 $ - $ - $ -
Issuance of Convertible Preferred ======== ======= ======= =======
Stock in satisfaction of
borrowings (Notes 6 and 10) $ 2,991 $ - $ - $ -
======= ======= ======= =======
Deferred loan costs arising from
issuance of warrants under
subordinated loans (Note 3) $ 427 $ 45 $ - $ -
======= ======= ======= =======
See accompanying notes to consolidated financial statements.
43
<PAGE>
nSTOR TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
==========================================
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Basis of Presentation
The consolidated financial statements include the accounts of nStor
Technologies, Inc. and all wholly-owned subsidiaries
(collectively, the "Company"). Significant intercompany balances
and transactions have been eliminated in consolidation.
Business
The Company is engaged as a manufacturer and supplier of
information storage solutions, including external RAID (Redundant
Array of Independent Disks) subsystems, Network Attached Storage
data storage enclosures, storage management software solutions and
AdaptiveRAID technology.
Prior to the acquisition of the RAID business 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 and Shareholders' Equity 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.
Restricted cash
At December 31, 1998 and 1997, approximately $.5 million and $1
million, respectively, of cash was pledged as collateral under
certain borrowings (see Note 6 to Consolidated Financial
Statements), and was classified as restricted cash.
44
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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.
Goodwill and Other Intangible Assets
Intangible assets, substantially goodwill, are carried at cost and
amortized under the straight-line method generally 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 recoverability based upon cash flow forecasts. No
impairment losses have been recognized in any of the periods
presented. At December 31, 1998, unamortized goodwill and other
intangible assets of $5.9 million was not considered to be
impaired.
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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 ("EPS")
Basic EPS is calculated by dividing the income (loss) available to
common shareholders by the weighted average number of common shares
outstanding for the period, without consideration for common stock
equivalents. Diluted EPS includes the effect of potentially
dilutive securities. For all periods presented, the effect of
including dilutive securities, stock options and warrants would
have been antidilutive. Accordingly, basic and diluted EPS for all
periods presented are equivalent.
As of December 31, 1998, outstanding potentially dilutive
securities include 2,946,500 shares underlying stock options,
7,366,667 shares underlying convertible preferred stock, 1,761,667
shares underlying warrants and 160,000 shares underlying
convertible debt.
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, 1998 and 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,
accounts payable and accrued liabilities. Fair values were
assumed to approximate carrying values for these financial
46
<PAGE>
instruments since they are short term in nature and their carrying
amounts approximate fair values or they are receivable or payable
on demand. The fair value of the Company's current borrowings and
long-term debt is estimated based upon quoted market prices for the
same or similar issues or on the current rates offered to the
Company for debt of the same remaining maturities. The carrying
value approximates the fair value of current borrowings and long-term debt.
Reclassifications
Certain prior years' amounts have been reclassified to conform to
the current year's presentations. These reclassifications had no
impact on operating results previously reported.
Comprehensive Income
During the year, the Company adopted SFAS Statement No. 130, "Reporting
Conprehensive Income" (SFAS 130) which requires the reporting of compre-
hensive income in addition to net income from operations. Comprehensive
income is a more inclusive financial reporting methodology that includes
disclosure of certain financial information that historically has not been
recognized in the calculation of net income.
Recently Issued Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) 98-1, "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use". SOP 98-1
provides guidance on accounting for the various types of costs incurred for
computer software developed or obtained for internal use. Also, in June
1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-Up
Activities". SOP 98-5 requires costs of start-up activities and organ-
izational costs, as defined, to be expensed as incurred. The Company will
adopt these SOPs on January 1, 1999; however, the Company does not expect
the adoption to materially impact the Company's Consolidated Financial
Statements.
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No.133, "Accounting for
Derivative Instruments and Hedging Activities" (SFAS 133). SFAS
133 requires companies to recognize all derivative contracts as
either assets or liabilities in the balance sheet and to measure
them at fair value. SFAS 133 is effective for periods beginning
after June 15, 1999. Historically, the Company has not entered
into derivative contracts. Accordingly, SFAS 133 is not expected
to affect the Company's financial statements.
47
<PAGE>
(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, with a corresponding reduction to
property and equipment and intangible assets. Effective October
31, 1996, the Company acquired the remaining 20% of the Subsidiary
from R. Daniel Smith, president of the Subsidiary at that time, in
exchange for one million shares of the Company's common stock,
valued at $600,000 (net of applicable discount) as of the date of
issuance. In connection with this acquisition, the Company
recorded goodwill of approximately $.3 million.
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 as of the date of acquisition. In
addition, the Company recorded approximately $5.8 million in
goodwill, including approximately $816,000, in certain accrued and
capitalized 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. Certain
operating policies and accounting procedures are different from
those of the previous owners. Accordingly, comparative financial
data of the acquired business for periods prior to the acquisition
are not presented in this section since they would be neither
comparable nor informative.
Effective April 23, 1998, the Company acquired all the outstanding
common stock of Borg Adaptive Technologies, Inc. ("Borg"), a
privately owned company headquartered in Boulder, Colorado, and the
developer of AdaptiveRAID, a patented next-generation RAID
technology. The purchase price consisted of $379,000 in cash,
including acquisition costs, and warrants to purchase 400,000
shares of the Company's common stock at $1.38 per share exercisable
on May 1, 1998 and expiring on December 26, 2000, valued at
$148,000 as of the date of acquisition. In addition, the Company
recorded approximately $.5 million in goodwill. In accordance with
the purchase agreement, the sellers of Borg (currently employees of
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<PAGE>
the Company) will receive a royalty payment equal to 5% of the
gross sales, as defined, of a certain product for as long as the
product is sold. Proforma consolidated results of operations were
not prepared as if the acquisition had occurred at the beginning of
fiscal 1998 since the acquisition was not significant.
All three 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 prices over the fair value
of net assets acquired (goodwill) aggregated approximately $6.5
million and is being amortized on a straight-line basis over 10 to
15 years. The Company also recorded approximately $347,000 as
intellectual assets, consisting of trademarks and proprietary
technology, which are being amortized on a straight-line basis over
15 years. For the year ended December 31, 1998 and 1997, the two
months ended December 31, 1996 and the year ended October 31, 1996,
amortization of intangible assets approximated $469,000, $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,
---------------
1998 1997
------ ------
Accounts Receivable
Trade receivables $2,964 $4,218
Less allowance for doubtful accounts (502) (500)
------ ------
2,462 3,718
Other receivables - 145
------ ------
$2,462 $3,863
====== ======
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<PAGE>
Inventories
Raw materials $2,641 $3,299
Work-in-process 95 -
Finished goods 292 278
------ ------
$3,028 $3,577
====== ======
Property and Equipment
Computer software $ 729 $ 907
Computer equipment 1,313 809
Furniture, fixtures and
office equipment 288 286
Leasehold improvements 332 283
Other 243 232
------ ------
2,905 2,517
Less accumulated depreciation (1,252) (457)
------ ------
$1,653 $2,060
====== ======
Depreciation expense amounted to approximately $883,000 and $366,000
for the years ended December 31, 1998 and 1997, respectively.
Goodwill and Other Intangible Assets
Goodwill $6,545 $6,038
Intellectual assets 347 347
------ ------
6,892 6,385
Less accumulated amortization (939) (470)
------ ------
$5,953 $5,915
====== ======
(5) INCOME TAXES
(a) As of December 31, 1998, there were unused net operating loss
carryforwards (the "NOL's") for regular federal income tax
purposes of approximately $18.4 million principally expiring
in 2012 and 2018, for which no financial statement benefit had
been recognized. In addition, the Company has research and
development tax credit carryforwards of approximately $802,000
which expire from 2002 through 2018 and in conjunction with
the Alternative Minimum Tax ("AMT") rules, the Company has
available AMT credit carryforwards of approximately $332,000,
at December 31, 1998, which may be used indefinitely to reduce
regular federal income taxes.
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<PAGE>
(b) For the year ended December 31, 1997, the provision for
federal income tax expense of $238,000 represents AMT taxes
paid during 1997.
(c) The tax effects of temporary differences that gave rise to
significant portions of deferred tax assets and liabilities
are as follows (in thousands):
December 31,
---------------
1998 1997
------ ------
Deferred tax assets:
Net operating loss carryforward $6,267 $2,853
Alternative minimum tax carryforward 332 238
Research and development credit
carryforward 802 637
Depreciation and amortization 148 269
Allowance for doubtful accounts - 170
------ ------
7,549 4,167
------ ------
Deferred tax liabilities:
Allowance for doubtful accounts 171 -
Inventory and warranty reserves 222 261
------ ------
Net deferred tax assets 7,156 3,906
Less valuation allowance (7,156) (3,906)
------ ------
$ - $ -
====== ======
(6) BORROWINGS
The Company's borrowings consisted of (in thousands):
December 31,
---------------
1998 1997
------ ------
Current
Asset based revolving bank credit
facility (the "Revolver") $ - $3,245
Director Loans 300 -
Other 200 200
------ ------
Total current borrowings $ 500 $3,445
====== ======
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<PAGE>
Long-Term
Subordinated Loans
(net of discount) $4,713 $ 950
Asset based revolving credit
facility (the "New Revolver") 1,738 -
Convertible Notes 592 554
------ ------
Total long-term borrowings $7,043 $1,504
====== ======
Revolving Credit Facilities
On August 3, 1998, the Company entered into the New Revolver, an
asset based revolving credit facility consisting of borrowings
based on the lesser of $5 million or 80% of the Company's eligible
accounts receivable, as defined. The New Revolver bears interest,
payable monthly, based on prime plus 2% (9-3/4% at December 31,
1998), is guaranteed by the Company and matures on August 3, 2000.
The Company pays a facility fee equal to 1% per annum on the total
facility of $5 million. Advances under the New Revolver are
collateralized by substantially all assets of the Company,
including $.5 million reflected as Restricted Cash at December 31,
1998. The loan agreement provides for certain financial covenants
including current ratio and net worth requirements, limitations on
operating losses and restrictions on the incurrence of additional
debt, capital expenditures and the payment of dividends, other than
preferred stock dividends. At December 31, 1998, the Company was
not in compliance with the financial covenant concerning the Company's
operating loss for 1998; however, effective February 4, 1999, the lender
agreed to forbear declaring a default.
Proceeds from the New Revolver were used to repay the Company's
previous Revolver, which matured on July 31, 1998, as extended.
Advances under the Revolver were collateralized by substantially
all assets of the Company, including approximately $1 million
reflected as Restricted Cash at December 31, 1997. As a result of
the Company's failure to be in compliance with certain financial
covenants, the Revolver was amended 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 million as of June 30, 1998 with
gradual reductions to $2.4 million thereafter until maturity.
Subordinated and Director Loans
At December 31, 1997, the Company's long-term debt included
$950,000 due to H. Irwin Levy, Chairman of the Board of Directors
and a principal stockholder of the Company. During 1998, Mr. Levy
and a company controlled by Mr. Levy (collectively, "Mr. Levy")
loaned an additional net amount of $3,350,000 (consisting of
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<PAGE>
$6,765,000 advanced, less $3,415,000 repaid) to the Company, with
interest at 10% per annum. During April 1998, Mr. Levy sold
participation interests in $1,000,000 of these loans, including
$750,000 to unrelated private investors, $125,000 to a company
controlled by Mark F. Levy, Vice President and a Director of the
Company and Mr. Levy's son, and $125,000 to a company controlled by
other members of Mr. Levy's family. In September and October 1998,
the Company issued 8% Convertible Preferred Stock, Series C (the
"Series C Preferred Stock" - Note 10) with a stated value of $2
million to Mr. Levy in satisfaction of $2 million of Mr. Levy's
loans, leaving an outstanding balance due to Mr. Levy of $1,300,000
as of December 31,1998. Of this amount, $300,000 is included in
current liabilities and $1,000,000 is included in Subordinated
Loans (see below). Pursuant to a Promissory Note, dated March 1,
1999, Mr. Levy has agreed to loan the Company up to an additional
$1 million through September 30, 1999. From March 1, 1999 through
March 31, 1999, the Company borrowed an additional $790,000 under
that Note.
In March 1998, three private investors loaned the Company an
aggregate of $3 million (together with the aforementioned
$1,000,000 due to Mr. Levy and the $1,000,000 of loans sold by Mr.
Levy, hereinafter referred to as the "Subordinated Loans"). The
Subordinated Loans bear interest at 10% per annum, payable monthly,
mature on September 5, 2000, as extended, are subordinated to the
New Revolver and are collateralized by substantially all assets of
the Company.
In February and March 1999, the Company borrowed $2.3 million from
three unrelated private investors, of which $1.8 million matures in
September 2000 and $500,000 in June 1999, all of which are
subordinated to the New Revolver.
In connection with the Subordinated Loans, warrants were issued to
purchase an aggregate of 1,666,668 shares of the Company's common
stock (including 666,666 to Mr. Levy of which 250,000 warrants were
subsequently transferred to unrelated private investors, 41,666 to
a company controlled by Mr. Mark Levy and 41,667 to a company
controlled by other members of Mr. Levy's family, all as part of
Mr. Levy's sale of participation interests) at an exercise price of
$1.50 per share, exercisable on the date of grant and expiring on
March 5, 2001. Effective September 22, 1998, the maturity date for
the Subordinated Loans was extended for one year to September 5,
2000. As consideration for the extension, the Company replaced the
previously issued warrants with new warrants under identical terms
but with exercise prices as follows: (i) warrants to purchase
750,000 shares exercisable at $1.00 per share and (ii) warrants to
purchase 916,668 shares exercisable at $1.25 per share. The
original and replacement warrants were valued under the Black-Scholes
option-pricing model on their respective dates of issuance
aggregating $424,000 and were recorded as a discount to the
Subordinated Loans, of which $137,000 has been amortized as
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<PAGE>
interest expense for the year ended December 31, 1998.
In connection with loans made by Mr. Levy during 1997, the Company
issued warrants to Mr. Levy to purchase 65,000 shares of the
Company's common stock at a purchase price of $2.35 per share,
exercisable on the dates of issuance, and expiring on October 1,
2000. The warrants were valued at $48,000 on the dates of
issuance, of which $20,000 and $28,000 were amortized as interest
expense for the years ended December 31, 1998 and 1997,
respectively.
Convertible Notes
The Company has issued certain convertible notes with a face amount
of $400,000, which have been discounted based on an effective
interest rate of 12%, include accrued interest of $214,000 and
$206,000 at December 31, 1998 and December 31, 1997, 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).
Maturites
Scheduled and estimated maturities of the Company's borrowings are
as follows:
Year ending December 31,
1999 $ 500
2000 7,043
------
$7,543
======
(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) SEGMENT INFORMATION AND SIGNIFICANT CUSTOMERS
The Company operates predominently in one business segment,
information storge solutions, including external RAID subsystems.
During 1998 and 1997, the Company had sales to two customers,
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<PAGE>
Discreet Logic (a Canadian customer) and Intergraph Corp., which
accounted for 27% and 13%, respectively, of net sales for 1998 and
11% and 10%, respectively, for 1997. One customer, Intergraph
Corp., accounted for 53% of net sales for the year ended October
31, 1996.
Sales to geographic areas other than the United States and Canada
have not been significant.
(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 , Michael Wise (currently a Director and
Vice Chairman of the Board of Directors). 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.
54
<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, its then president, R. Daniel Smith ("Mr. 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.
In June 1998, a Complaint was filed in the Supreme Court of the
State of New York by AIBC Investment Services Corp. ("the
Plaintiff"), which claims that the Company, its wholly-owned
subsidiary and Mr. Smith (the "Defendants") breached an agreement
wherein the Plaintiff was allegedly engaged as placement agent in
connection with raising funds for the Defendants. The Plaintiff
seeks damages in the amount of not less than $262,500 plus
interest, warrants to purchase the Company's common stock at a
price to be determined and punitive damages. The case is in the
initial stages of discovery and the Company believes that the
claims are without merit and will not result in any material
liability.
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<PAGE>
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.
(10) 8% CONVERTIBLE PREFERRED STOCK
In March 1997, the Securities and Exchange Commission Staff (the
"Staff") announced its position on accounting for preferred stock
which is convertible into common stock at a discount from the
market rate at the date of issuance. The Staff indicated that a
preferred stock dividend, attributable to such a beneficial
conversion privilege should be recorded for the difference between
the conversion price and the quoted market price of common stock at
the date of issuance. Accordingly, during 1998, the Company
recorded $1,218,000 as an additional embedded dividend attributable
to the beneficial conversion privilege on its convertible preferred
stock, including $1,045,000 on the Series B Preferred Stock and
$173,000 on the Series A Preferred Stock (see below).
Series B
Effective April 14, 1998, the Company received $3.2 million in cash
(net of $.3 million in issuance costs), including $1 million from
Mr. Levy, from a private placement of 8% Convertible Preferred
Stock, Series B (the "Series B Preferred Stock"). The Series B
Preferred Stock was convertible into common stock, on various dates
through April 2000, at a conversion price equal to the lesser of
$1.44 per share or 77% of the market price at the date of
conversion. At closing, the Company issued warrants to purchase
280,000 shares of the Company's common stock (including 80,000 to
Mr. Levy), exercisable at any time through April 2001 at an
exercise price of $1.50 per share.
In July and September 1998, $200,000 of the Series B Preferred
Stock held by unrelated private investors was converted into
394,949 shares of the Company's common stock.
On October 30, 1998, the Company redeemed $2.3 million of the
Series B Preferred Stock held by unrelated private investors for
approximately $2.5 million in cash (including a premium of $115,000
and accrued dividends of $102,000) and warrants to purchase 300,000
shares of the Company's common stock, exercisable upon issuance at
$1.00 per share and expiring in October 2001. In conjunction with
this redemption, effective October 28, 1998, the Company issued
Series C Preferred Stock (see below) with a stated value of $1
million in exchange for the remaining $1 million of Series B
Preferred Stock which was held by Mr. Levy.
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<PAGE>
As a result of these two transactions, all of the Company's
convertible preferred stock which was based on a variable
conversion price was redeemed either for cash or preferred stock
that is based on a fixed conversion price.
Series A
On July 7, 1998, the Company borrowed $1 million from a private
investor under an 8% Convertible Subordinated Debenture (the
"Debenture"), payable on September 25, 1998, as extended. In
September 1998, the Debenture was converted into 1,667 shares of
the Company's 8% Convertible Preferred Stock, Series A (the "Series
A Preferred Stock").
The Series A Preferred Stock with a stated value of $1 million as
of December 31, 1998 accrues dividends at 8% per annum, payable
quarterly, is convertible into shares of the Company's common stock
based on a fixed conversion price of $.60 per share, commencing
July 7, 1999, and has an automatic conversion feature in which each
share not converted as of July 7, 2000 automatically converts into
shares of the Company's common stock.
Series C
The Series C Preferred Stock with a stated value of $3 million
(including the $1 million that was exchanged for Series B) as of
December 31, 1998 accrues dividends at 8% per annum, payable
quarterly, is convertible into shares of the Company's common stock
based on a fixed conversion price of $1.00 per share, commencing
July 7, 1999, and has an automatic conversion feature in which each
share not converted as of July 7, 2000 automatically converts into
the Company's common stock.
Series D
During October 1998, the Company received $2.7 million in cash from
unrelated private investors in a private placement of its 8%
Convertible Preferred Stock, Series D (the "Series D Preferred
Stock"). Of this amount, $2.5 million was used in the redemption
of the Series B Preferred Stock. The Series D Preferred Stock with
a stated value of $2,700,000 as of December 31, 1998, accrues
dividends at 8% per annum, payable quarterly, is convertible into
shares of the Company's common stock based on a fixed conversion
price of $1.00 per share commencing April 27, 1999, and has an
automatic conversion feature in which each share not converted
into the Company's common stock within three years from the date of
issuance is automatically converted.
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(11) 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; expected lives of ten years; volatility at 60% for 1998,ranging
from 57% to 60% for 1997 and 30% for 1996, and; risk-free interest rates of
5.3% for 1998, ranging from 5.7% to 6.79% for 1997 and 6.7% for 1996.
Under the accounting provisions of SFAS 123, the Company's net loss and
loss per share, for the year ended December 31, 1998, would have been
reduced to the pro forma amounts indicated below (in thousands, except per
share):
Year Ended Two Months
December 31, Ended
------------------- December 31,
1998 1997 1996
Net loss: -------- -------- ------------
As reported ($10,407) ($7,886) ($ 43)
Pro forma ($10,836) ($8,123) ($672)
Loss per share:
As reported ($.55) ($.42) ($.00)
Pro forma ($.57) ($.43) ($.04)
Changes in options outstanding are summarized as follows:
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<PAGE>
Weighted-
Average
Weighted- Fair
Average Value Per
Exercise Share of
Price Options
Shares Per Share Granted
(in thousands)
------ --------- ---------
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 (35) 2.10
-----
Balance, December 31, 1997 1,765 2.48
-----
Granted - equal to
market value 881 1.38 1.03
Granted - exceeds
market value 1,160 1.14 .52
Forfeited (860) 1.98
-----
Balance, December 31, 1998 2,946(a) 1.67
=====
__________
(a) In June 1998, the Company granted a conditional Employee
Incentive Stock Option to its President, Lawrence F. Steffann,
to purchase 750,000 shares of the Company's common stock. The
grant is conditional because of the 2.5 million share
limitation under the Plan. The agreement provides for the
removal of the condition upon approval by the Company's
shareholders (at its 1999 Annual Meeting of Stockholders) of
an amendment to the Plan to increase the number of shares
reserved for issuance under the Plan.
At December 31, 1998, 1997 and 1996, a total of 1,189,000, 705,000
and 475,000, respectively, of the outstanding options were
exercisable with a weighted-average exercise price of $2.31, $2.91
and $3.20, respectively, per share.
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<PAGE>
The following table summarizes information about fixed stock
options at December 31, 1998:
Weighted
Weighted Average
Number Average Weighted Number Exercise
Outstanding Remaining Average Exercisable Price of
Exercise at Dec. 31, Contractual Exercise at Dec. 31, Exercisable
Prices 1998 Life Price 1998 Options
(in thousands) (in thousands)
- -------- ----------- ----------- -------- ----------- -----------
$.50-$1.50 1,885 9.3 years $1.20 192 $1.23
$2.00-$2.38 861 8.3 years $2.14 797 $2.14
$4.00 200 8.0 years $4.00 200 $4.00
----- -----
2,946 1,189
===== =====
At December 31, 1998, the Company had outstanding warrants under
which 1,762,000 shares of common stock could be acquired.
Information relating to these warrants is summarized as follows:
Number
of Shares
Expiration Subject to Exercise
Date Warrants Price
(in thousands)
---------- ---------- --------
December 1999 500 $2.10
October 2000 65 $2.35
December 2000 400 $1.38
March 2001 417 $1.25
April 2001 80 $1.50
October 2001 300 $1.10
-----
1,762
=====
As of December 31, 1998, the Company had reserved common stock for
the following purposes (in thousands):
Convertible preferred stock 7,367
1996 Stock Option Plan 2,500
Stock Option Plan (b) 446
Stock warrants 1,762
Convertible notes payable 160
------
12,235
======
60
<PAGE>
__________
(b) Represents the number of common shares that
were conditionally granted because they exceed
the 2.5 million shares reserved under the
Plan.
(12) RELATED PARTY TRANSACTIONS
Hilcoast Advisory Services, Inc. ("Advisor")
From July 1, 1996 through October 31, 1997, the Company paid $6,000
per month, plus reimbursement of out-of-pocket expenses, to Advisor
for certain financial consulting and administrative services to the
Company. Mr. Levy is the Chairman of the Board, Chief Executive
Officer and a majority shareholder of the Advisor's parent.
Management believes that the terms of this agreement were no less
favorable to the Company than those that would be received from
other sources.
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,
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.
(13) LEASES
The Company leases its operating facilities under operating leases
which expire at various dates through February 2002. At December
31, 1998, future minimum rental payments under operating leases
that have initial or remaining terms in excess of one year were as
follows (in thousands):
1999 $454
2000 317
2001 150
2002 22
----
$943
====
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<PAGE>
Rent expense was $513,000 and $485,000 for the years ended December
31, 1998 and 1997, respectively, $57,000 for the two months ended
December 31, 1996 and $62,000 for the year ended October 31, 1996.
(14) 401(k) PLAN
The Company's 401(k) Tax Deferred Savings Plan (the "401(k) Plan")
covers substantially all employees meeting certain minimum age and
service requirements. Contributions to the plan are determined by
the Board of Directors. No contributions have been made by the
Company to the 401(k) Plan as of December 31, 1998.
(15) SUBSEQUENT EVENTS
From January 1, 1999 to April 15, 1999, the Company obtained approximately
$3.1 million from borrowings, consisting of $2.3 million from private
investors and $790,000 from Mr. Levy (see Note 6 to Consolidated Statements),
and approximately $2.6 million from the exercise of options and warrants and
the issuance of 500,000 shares of newly issued common stock to a private
investor.
In March 1999, the Company entered into an agreement to purchase 75% of the
outstanding common stock of Andataco, Inc. ("Andataco") from its principal
stockholder, David Sykes. That agreement also contemplates that the Company
would purchase from Mr. Sykes a note in the principal amount of $5,196,000,
issued to him by Andataco. Following the purchase of Mr. Sykes' shares, he
would continue to serve as President of Andataco, pursuant to a proposed
three-year employment agreement. The purchase is contingent on the Company
raising the capital necessary to fund the acquisition. If the transaction
is completed, it would be the Company's intention to acquire the remaining
Andataco shares as soon as possible following an independent professional
determination of the fair value of such shares.
The Company is currently negotiating with unrelated private investors to
obtain approximately $15 million in a private placement of convertible
preferred stock (the "Private Placement"). Proceeds from the Private
Placement would be used to finance the proposed Andataco acquisition, if
consummated, and to provide additional working capital for the Company.
There can be no assurance, however, that the Company will be successful in
obtaining the funds necessary to finance the proposed acquisition nor that
the acquisition will be completed.
In March 1999, the Company received the initial purchase order under a
recently established OEM relationship to supply high-performance RAID
storage enclosures to Silicon Graphics, Inc. (SGI), a major computer server
manufacturer. The purchase order calls for the Company to ship approximately
$5.8 million of products to SGI commencing in the second quarter of 1999. The
62
<PAGE>
initial term of the OEM arrangement is expected to be for three (3) years. A
discontinuation or significant reduction of this relationship could have a
material adverse effect on the Company's business.
(16) 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 those adjustments on
prior quarters in 1997 because of implementation issues with the
materials requirement planning system.
(17) COMMITMENTS
As of December 31, 1998, the Company had four long-term employment
agreements including an agreement with the Company's president,
Lawrence F. Steffann, which expires on June 1, 2001, and agreements
with three employees made in connection with the Borg acquisition,
all of which expire January 31, 2003.
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 1999 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.
63
<PAGE>
Item 12. Security Ownership of Certain Beneficial
Owners and Management
For information concerning this item, see the table and text of
"Security Ownership" and "Management" in the Proxy Statement, which
information is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
For information concerning this item, see the text under the
caption "Certain Transactions" in the Proxy Statement, which
information is incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K
(a) (1) Financial Statements - See index to Consolidated
Financial Statements at page 35 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 65-69 of this Form
10-K.
(b) No reports were filed or amended by the Registrant on
Form 8-K during the fourth quarter of 1998.
64
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
3.1 Restated Certificate of Incorporation filed with State of
Delaware on November 30, 1998
3.2 By-laws of Registrant, as amended (6)
3.3 Certificate of Elimination of the Designation of the Series
A Preferred Stock of Registrant (3)
4.1 Form of Warrant dated January 26, 1999 issued in connection
with Promissory Note dated January 26, 1999 between
Registrant, (i) Herbert Gimelstob, for 200,000 shares, (ii)
Maurice Halperin, for 200,000 shares, (iii) Patricia Auld,
for 100,000 shares and (iv) James P. Marden, for 100,000
shares
4.2 Certificate of Designation of Series A Convertible Preferred
Stock (1)
4.3 Certificate of Designation of Series B Convertible Preferred
Stock (1)
4.4 Form of Share Exchange Agreement dated June 9, 1998 between
Registrant and holders of the Series A Preferred Stock
whereby such holders exchanged their Series A Preferred
Stock for Series B Preferred Stock (3)
4.5 Certificate of Designation of Series C Convertible Preferred
Stock (1)
4.6 Certificate of Designation of Series D Convertible Preferred
Stock (1)
4.7 Form of Warrant dated September 22, 1998 issued in
connection with extending certain subordinated notes as
follows: (i) Bernard Marden - 333,334 shares; (ii) Herbert
Gimelstob - 416,667 shares; (iii) Fairway Partnership -
333,334 shares; (iv) H. Irwin Levy - 166,666 shares; (v)
Bernard Green - 83,333 shares; (vi) Meyer Capital - 83,333
shares; (vii) MLL Corp. - 166,666 shares; (viii) JoJo Corp.
- 41,666 shares; (ix) N&S Corp. - 41,667 shares
4.8 Subscription Agreement between Registrant and Maurice
Halperin in connection with Series A Convertible Preferred
Stock (1)
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<PAGE>
4.9 Registration Rights Agreement between Registrant and Maurice
Halperin in connection with Series A Convertible Preferred
Stock (1)
4.10 Form of Warrant dated October 28, 1998 issued in connection
with Redemption of Series B Convertible Preferred Stock,
between Registrant and (i) CPR (USA), Inc., 180,000 shares,
(ii) LibertyView Fund, 23,400 shares and (iii) LibertyView
Plus Fund, 96,600 shares (1)
4.11 Form of Subscription Agreement between Registrant and H.
Irwin Levy for loans made by H. Irwin Levy to Registrant
which were exchanged for Series C Convertible Preferred
Stock (1)
4.12 Subscription Agreement between Registrant and H. Irwin Levy
for the exchange of Series B Convertible Preferred Stock for
Series C Convertible Preferred Stock (1)
4.13 Registration Rights Agreement between Registrant and H.
Irwin Levy for Series C Convertible Preferred Stock (1)
4.14 Letter Agreement between Registrant and H. Irwin Levy
regarding Series C Convertible Preferred Stock (1)
4.15 Letter Agreement between Registrant and LibertyView Capital
Management, Inc. regarding the redemption of $2.3 million of
Series B Convertible Preferred Stock (1)
4.16 Letter Agreement between Registrant and LibertyView Capital
Management, Inc. regarding registration rights for warrants
issued in connection with the redemption of $2.3 million of
Series B Convertible Preferred Stock (1)
4.17 Form of Subscription Agreement for Series D Convertible
Preferred Stock (1)
4.18 Form of Registration Rights Agreement for Series D
Convertible Preferred Stock (1)
4.19 Restated Certificate of Incorporation of the Registrant, -
see Exhibit 3.1 above
4.20 By-Laws of Registrant, as amended - see Exhibit 3.3 above
(3)
4.21 8% Convertible Subordinated Debenture dated June 7, 1998
issued by Registrant to Maurice Halperin, as amended on
August 7, 1998 (2)
66
<PAGE>
10.1 Promissory Note for $500,000 dated March 15, 1999 between
Registrant and Maurice Halperin
10.2 Promissory Note for $1 million dated March 1, 1999 between
Registrant and H. Irwin Levy
10.3 Form of Promissory Note dated January 26, 1999 between
Registrant and (i) Herbert Gimelstob ($600,000), (ii)
Maurice Halperin ($600,000), (iii) Patricia Auld ($300,000)
and (iv) James P. Marden ($300,000)
10.4 Loan and Security Agreement dated August 3, 1998 by and
among the Registrant, nStor Corporation, Inc. and Finova
Capital Corporation (2)
10.5 Form of Amended and Restated Promissory Note dated September
22, 1998 between Registrant and Bernard Marden, Herbert
Gimelstob, Fairway partnership and H. Irwin Levy (1)
10.6 Security Agreement between Registrant and H. Irwin Levy
dated July 31, 1998 (1)
10.7 Loan Agreement between Registrant and H. Irwin Levy dated
July 31, 1998 for $1.5 million (1)
10.8 Employment Agreement between Registrant and Lawrence
Steffann, President of the Registrant, dated as of June 1,
1998
10.9 Employee Incentive Stock Option Agreement between Registrant
and Lawrence Steffann, dated as of June 1, 1998
10.10 Asset Purchase Agreement, dated May 23, 1996, between
Seagate Peripherals, Inc. as seller and Intelligent
Manufacturing Systems, Inc. as purchaser. (7)
10.11 Amendment No. 1 to the Asset Purchase Agreement, dated June
4, 1996, between Seagate Pheripherals, Inc. and Intelligent
Manufacturing Systems, Inc. (7)
10.12 Assignment of Asset Purchase Agreement by Intelligent
Manufacturing Systems, Inc. to nStor Corporation, Inc. (7)
10.13 Consent to Assignment of Asset Purchase Agreement by Seagate
Peripherals, Inc. (7)
10.14 Asset Purchase Agreement Between Parity Systems, Inc. and
nStor Corporation, Inc., dated November 30, 1996. (8)
10.15 Form of Warrant, dated December 30, 1996, granting Parity
Systems, Inc. the right to purchase 500,000 shares of the
Registrant's common stock. (8)
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<PAGE>
10.16 Agreement and Plan of Reorganization by and among nStor
Technologies, Inc., nStor Corporation, Inc. and R. Daniel
Smith, dated October 31, 1996. (6)
10.17 1996 Stock Option Plan, dated October 5, 1996. (6)
10.18 Promissory Note from Registrant to H. Irwin Levy dated,
September 16, 1997 for $1 million. (11)
10.19 Letter Agreement between H. Irwin Levy and Registrant, dated
September 16, 1997 regarding note incorporated by reference
at 10.18. (11)
10.20 Amended and Restated Promissory Note dated March 5, 1998
between Registrant and H. Irwin Levy for $2 million, which
amends the Note referenced at 10.18. (5)
10.21 Amended and Restated Loan Agreement dated March 5, 1998
between H. Irwin Levy and Registrant, in the amount of $2
million. (5)
10.22 Promissory Note in the amount of $1 million dated March 5,
1998 between Fairway Partnership and Registrant (Duplicate
notes were also executed for the same amount between
Registrant and (i) Bernard A. Marden and (ii) Herbert
Gimelstob.) (5)
10.23 Amended and Restated Security Agreement dated March 5, 1998
between H. Irwin Levy, Fairway Partnership, Herbert
Gimelstob, and Bernard A. Marden (collectively, referred to
as "Secured Parties") (5)
10.24 Collateral Assignment of Note, Loan Agreement, Security
Agreement and Security Instruments among Registrant and
Secured Parties, dated March 5, 1998. (5)
10.25 Stock Purchase Agreement dated February 2, 1998 between
nStor Corporation, Inc. and David Stallmo, Randy K. Hall and
Gerald Hohoenstein (4)
10.26 Form of amendment to Stock Purchase Agreement at 10.30 (four
amendments, all of which extended the closing date of the
proposed transaction) (4)
21 Subsidiaries of the Registrant.
27 Financial Data Schedule.
______________
(1) Incorporated by reference to Exhibits previously filed as
Exhibits to Registrant's Form 10-Q for the quarter ended
September 30, 1998, filed November 16, 1998.
68
<PAGE>
(2) Incorporated by reference to Exhibits previously filed as
Exhibits to Registrant's Form 10-Q for the quarter ended
June 30, 1998, filed August 13, 1998.
(3) Incorporated by reference to Exhibits previously filed as
Exhibits to Registrant's Amendment No.1 to Registration
Statement on Form S-3 filed on June 22, 1998.
(4) Incorporated by reference to Exhibits previously filed as
Exhibits to Registrants Form 10-Q for the quarter ended
March 31, 1998, filed May 15, 1998.
(5) Incorporated by reference to Exhibits filed as Exhibits to
Registrants Form 10-K for the year ended December 31, 1997,
filed on April 15, 1998.
(6) Incorporated by reference to Exhibits previously filed as
Exhibits to Registrant's Form 10-K dated January 27, 1997,
filed January 28, 1997.
(7) Incorporated by reference to Exhibits previously filed as
Exhibits to Registrant's Form 8-K/A dated June 18, 1996,
filed September 3, 1996.
(8) Incorporated by reference to Exhibits previously filed as
Exhibits to Registrant's Form 8-K dated December 30, 1996,
filed January 13, 1997.
(9) Incorporated by reference to Exhibits previously filed as
Exhibits to Registrant's Form 8-K/A dated December 30, 1996,
filed March 14, 1997.
(10) 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.
(11) 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.
69
<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/ Lawrence F. Steffann
April 12, 1999 By:_________________________________
Lawrence F. Steffann, 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/ Lawrence F. Steffann
April 12, 1999 ___________________________________________
Lawrence F. Steffann, President and Director
/s/ Mark F. Levy
April 13, 1999 ___________________________________________
Mark F. Levy, Vice President and Director
/s/ Michael L. Wise
April 9 , 1999 ___________________________________________
Michael L. Wise, Vice President and Director
/s/ Larry Calise
April 12, 1999 ___________________________________________
Larry Calise, Principal Financial
Officer and Principal Accounting Officer
/s/ H. Irwin Levy
April 13, 1999 ___________________________________________
H. Irwin Levy, Director
April , 1999 ___________________________________________
Bernard Green, Director
/s/ James E. McGrath
April 14, 1999 ___________________________________________
James E. McGrath, Director
Exhibit 3.1
RESTATED CERTIFICATE OF INCORPORATION
OF
nSTOR TECHNOLOGIES, INC.
The undersigned hereby certifies that the following Restated
Certificate of Incorporation of nStor Technologies, Inc. (the
"Corporation") was duly adopted in accordance with Section 245 of
the Delaware General Corporation Law. This Restated Certificate of
Incorporation restates and integrates but does not further amend
the Certificate of Incorporation. The original Certificate of
Incorporation (previously filed under the name of Pacific Coast
Properties, Inc.) was filed with the Secretary of State of Delaware
on November 23, 1959, a subsequent Restated Certificate of
Incorporation (previously filed under the name of Communications &
Cable Inc.), as amended, was filed in Delaware on July 21, 1987,
and a subsequent Restated Certificate of Incorporation was filed in
Delaware on June 22, 1998.
ARTICLE FIRST: The name of the Corporation is nSTOR
TECHNOLOGIES, INC.
ARTICLE SECOND: The address of the Corporation's registered
office in the State of Delaware is 15 E. North Street, City of
Dover, Delaware 19901, County of Kent. The name of its registered
agent at such address is United Corporate Services, Inc.
ARTICLE THIRD: The nature of the business or purposes to be
conducted or promoted by the Corporation is to engage in any lawful
act or activity for which corporations may be organized under the
General Corporation Law of Delaware.
ARTICLE FOURTH: (a) The total number of shares which the
Corporation is authorized to issue is forty-one million
(41,000,000). The Corporation is authorized to issue two classes
of shares to be designated, respectively, "Preferred Stock" and
Common Stock." The number of shares of Preferred Stock authorized
to be issued is one million (1,000,000) and the number of shares of
Common Stock authorized to be issued is forty million (40,000,000).
The Preferred Stock shall have a par value of $.01 per share and
the Common Stock shall have a par value of $.05 per share. The
aggregate par value of all shares of Preferred Stock is $10,000 and
the aggregate par value of all shares of Common Stock is
$2,000,000.
(b) The shares of Preferred Stock may be issued from time to time
in one or more series. The Board of Directors is authorized,
subject to limitations prescribed by law and the provisions of this
Article Fourth, to provide for the issuance of the shares of
Preferred Stock in series, and by filing a certificate pursuant to
the applicable law of the State of Delaware, to establish from time
to time the number of shares to be included in each such series,
and to fix the designation, powers, preferences and the rights of
the shares of each such series and the qualifications, limitations
or restrictions thereof.
(c) The authority of the Board with respect to each series shall
include, but not be limited to, determination of the following:
(i) The number of shares constituting that series and the
distinctive designation of the series;
(ii) The dividend rate on the shares of that series, whether
dividends shall be cumulative, and, if so, from which date or
dates, and the relative rights of priority, if any, of payment of
dividends on shares of that series;
(iii) Whether that series shall have voting rights, in addition
to any voting rights provided by law, and, if so, the terms of such
voting rights and whether the series shall have the right to vote
cumulatively;
(iv) Whether that series shall have conversion privileges, and,
if so, the terms and conditions of such conversion, including
provision for adjustment of the conversion rate in such events as
the Board of Directors shall determine;
(v) Whether or not the shares of that series shall be
redeemable, and, if so, the terms and conditions of such
redemption, including the date or dates upon or after which they
shall be redeemable, and the amount per share payable in case of
redemption, which amount may vary under different conditions and at
different redemption dates;
(vi) Whether that series shall have a sinking fund for the
redemption or purchase of shares of that series, and, if so, the
terms and amount of such sinking fund;
(vii) The rights of the shares of that series in the event of
voluntary or involuntary liquidation, dissolution or winding up of
the Corporation, and the relative rights of priority, if any, of
payment of shares of that series;
(viii) Any other relative or participating rights, preferences
and limitations of that series.
(d) The number of authorized shares of Preferred Stock may be
increased or decreased by the affirmative vote of the holders of a
majority of the stock of the Corporation that is entitled to vote
without a class vote of the Preferred Stock or any class or series
thereof, except as may otherwise be provided in the resolution or
resolutions affixing the voting rights of such class or series.
(e) Attached hereto as Exhibits 1, 2 and 3 are copies of the
Certificates of Designation of the Series A, Series C and Series D
Convertible Preferred Stock filed with the Secretary of State on
September 30, 1998, September 30, 1998 and October 29, 1998,
respectively, which Certificates created separate series of
Preferred Stock and each of which sets forth the rights and
preferences of each series.
ARTICLE FIFTH: The Corporation shall have perpetual
existence.
ARTICLE SIXTH: In furtherance and not in limitation of the
powers conferred by statute, the Board of Directors is expressly
authorized to make, alter, amend or repeal the bylaws of the
Corporation, except to the extent that the bylaws or this
Certificate of Incorporation otherwise provide.
ARTICLE SEVENTH: The number of directors of the Corporation
shall be fixed and may be altered from time to time in the manner
provided in the bylaws of the Corporation, and vacancies in the
Board of Directors and newly created directorships resulting from
any increase in the authorized number of directors may be filled,
and directors may be removed, as provided in the bylaws.
ARTICLE EIGHTH: At all elections of directors of the
Corporation, each holder of Common Stock shall be entitled to as
many votes as shall equal the number of votes which (except for
such provision as to cumulative voting) he would be entitled to
cast for the election of directors with respect to his shares of
Common Stock multiplied by the number of directors to be elected by
him, and he may cast all of such votes for a single director or may
distribute them among the number to be voted for, or for any two or
more of them as he may see fit.
ARTICLE NINTH: Meetings of stockholders may be held within or
without the State of Delaware, as the bylaws may provide. The
books of the Corporation may be kept (subject to any provision
contained in the statutes) outside the State of Delaware at such
place or places as may be designated from time to time by the Board
of Directors or in the bylaws of the Corporation.
ARTICLE TENTH: To the fullest extent permitted by the
Delaware General Corporation Law, as the same exists or as may
hereafter be amended, a director of the Corporation shall not be
personally liable to the Corporation or its stockholders for
monetary damages for breach of fiduciary duty as a director.
Neither any amendment nor repeal of this Article Tenth, nor the
adoption of any provision of this Certificate of Incorporation
inconsistent with this Article Tenth, shall eliminate or reduce the
effect of this Article Tenth in respect of any matter occurring, or
any cause of action, suit or claim that, but for this Article
Tenth, would accrue or arise, prior to such amendment, repeal or
adoption of an inconsistent provision.
ARTICLE ELEVENTH: The election of directors need not be by
written ballot unless a stockholder demands election by written
ballot at a meeting of stockholders before the voting begins.
ARTICLE TWELFTH: The Corporation reserves the right to amend,
alter, change or repeal any provision contained in this Certificate
of Incorporation, in the manner now or hereafter prescribed by
statute, and all rights conferred upon stockholders herein are
granted subject to this reservation.
IN WITNESS WHEREOF, I have hereunto set my hand this 18TH day
of November, 1998.
STOR TECHNOLOGIES, INC.
/s/ Mark F. Levy
By:_______________________________
Mark F. Levy, Vice President
Exhibits 1, 2 and 3 are omitted here.
See Exhibit 4.2, 4.5 and 4.6 for
incorporation by reference of these
exhibits.
EXHIBIT 4.1
THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE THEREOF HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"ACT"), AND MAY NOT BE OFFERED, SOLD, ASSIGNED, TRANSFERRED OR
OTHERWISE DISPOSED OF UNLESS REGISTERED PURSUANT TO THE ACT OR AN
OPINION OF LEGAL COUNSEL, REASONABLY SATISFACTORY TO THE COMPANY,
IS OBTAINED STATING THAT AN EXEMPTION FROM REGISTRATION UNDER THE
ACT IS AVAILABLE. THIS WARRANT MAY NOT BE SOLD, TRANSFERRED OR
ASSIGNED EXCEPT UNDER THE LIMITED CIRCUMSTANCES DESCRIBED HEREIN.
DATED: January 26, 1999 NO. __
FORM OF
WARRANT
nSTOR TECHNOLOGIES, INC.
Warrant to Purchase _______ Shares
of Common Stock, par value $.05 per share
VOID AFTER 5:00 P.M., EASTERN STANDARD TIME
ON JANUARY 25, 2002
The Company (as hereafter defined) has issued to Holder (as
hereafter defined) that certain Promissory Note dated January 26,
1999, in the principal amount of $_______ (the "Note"). In partial
consideration of Holder's agreement to deliver the proceeds of the
loan to the Company, the Company desires to issue this Warrant (as
hereafter defined) in accordance with the terms and conditions set
forth herein.
This certifies that, for value received, _____________________ or
registered assigns (collectively with ___________, the "Holder"),
is entitled to purchase from nStor Technologies, Inc., a Delaware
corporation (the "Company"), Two Hundred Thousand (200,000) fully
paid and nonassessable shares (the "Shares") of the Common Stock,
par value $.05 per share, of the Company ("Common Stock") at a
price of $3.00 per Share (the "Exercise Price") at any time from
and after January 26, 1999 to and including 5:00 p.m. Eastern
Standard Time on January 25, 2002 (the "Exercise Period"), subject
to the terms, conditions and adjustments set forth in this Warrant
(the "Warrant").
1. Exercise of Warrants. This Warrant may be exercised in whole
or in part by the Holder during the Exercise Period upon
presentation and surrender hereof, with the attached Purchase Form
duly executed, at the office of the Company located at 100 Century
Boulevard, West Palm Beach, FL 33417, accompanied by full payment
of the Exercise Price multiplied by the number of Shares of the
Company being purchased (the "Purchase Price"), whereupon the
Company shall cause the appropriate number of Shares to be issued
and shall deliver to the Holder, as promptly as practicable, a
certificate representing the Shares being purchased. This Warrant
may be exercised for not less than 1,000 Shares and in additional
increments of 1,000 Shares at any time and from time to time during
the Exercise Period. Upon each partial exercise hereof, a new
Warrant evidencing the remainder of the Shares will be issued to
the Holder, at the Company's expense, as soon as reasonably
practicable, at the same Exercise Price, for the same Exercise
Period, and otherwise of like tenor as the Warrant partially
exercised. The Purchase Price shall be payable by delivery of a
certified or bank cashier's check payable to the Company, or by
wire transfer of immediately available funds to an account
designated in writing by the Company, in the amount of the Purchase
Price. The Holder shall be deemed for all purposes to have become
the holder of record of Shares so purchased upon exercise of this
Warrant as of the close of business on the date as of which this
Warrant, together with a duly executed Purchase Form, was delivered
to the Company and payment of the Purchase Price was made,
regardless of the date of delivery of any certificate representing
the Shares so purchased, except that if the Company were subject to
any legal requirements prohibiting it from issuing shares of Common
Stock on such date, the Holder shall be deemed to have become the
record holder of such Shares on the next succeeding date as of
which the Company ceased to be so prohibited.
2. Exchange; Restrictions on Transfer or Assignment. This
Warrant is exchangeable, without expense, at the option of the
Holder, upon surrender hereof to the Company for other Warrants of
like tenor of different denominations entitling the Holder to
purchase in the aggregate the same number of Shares purchasable
hereunder. This Warrant and the Holder's rights hereunder may not
be transferred, assigned or subjected to a pledge or security
interest, except that the Holder may transfer this Warrant in whole
or in part (in minimum increments of 1,000 Shares) to a corporation
controlled by or under common control with the Holder, by surrender
of this Warrant to the Company at its principal office with the
assignment form attached hereto duly completed and executed (with
signature guaranteed), whereupon the Company, if it determines that
the proposed assignment is permitted pursuant to the provisions
hereof, shall register the assignment of this Warrant in accordance
with the information contained in the assignment instrument and
shall, without charge, execute and deliver a new Warrant or
Warrants in the name of the assignee or assignees named in such
assignment instrument (and, if applicable, a new Warrant in the
name of the Holder evidencing any remaining portion of the Warrant
not theretofore exercised, transferred or assigned) and this
Warrant shall promptly be cancelled. Conditions to the transfer of
this Warrant or any portion thereof shall be that (x) Holder
deliver to the Company an opinion of counsel, reasonably
satisfactory in form and substance to the Company's counsel, to the
effect that the proposed transfer will not be in violation of the
Securities Act of 1933, as amended (the "Act") or of any applicable
state law and that (y) the proposed transferee deliver to the
Company his or its written agreement to accept and be bound by all
of the terms and conditions of this Warrant. The term "Warrant" as
used herein includes any Warrants into which this Warrant may be
divided or exchanged.
3. Rights and Obligations of Warrant Holders. This Warrant does
not confer upon the Holder any rights as a shareholder of the
Company, either at law or in equity. The rights of the Holder are
limited to those expressed herein and the Holder, by acceptance
hereof, consents to and agrees to be bound by and to comply with
all the provisions of this Warrant. Each Holder, by acceptance of
this Warrant, agrees that the Company and its transfer agent, if
any, may, prior to any presentation of this Warrant for
registration of transfer, deem and treat the person in whose name
this Warrant is registered as the absolute, true and lawful owner
of this Warrant for all purposes whatsoever and neither the Company
nor any transfer agent shall be affected by any notice to the
contrary.
4. Covenants and Warranties of the Company Stock. The Company
covenants and agrees that (i) all Shares which may be issued and
delivered upon exercise of this Warrant and payment of the Purchase
Price will, upon delivery, be duly authorized, validly issued,
fully-paid and nonassessable shares of Common Stock; and (ii) the
Company shall at all times during the Exercise Period reserve and
keep available a number of authorized but unissued shares of Common
Stock sufficient to permit the exercise in full of this Warrant.
The Company will take all such actions as may be necessary to
assure that all shares of Common Stock may be so issued without
violation by the Company of any applicable law or government
regulation or any requirement of any securities exchange upon which
shares of Common Stock may be listed (except for official notice of
issuance, which the Company will transmit promptly upon issuance of
such shares).
The Company represents and warrants that: (i) the Company is a
corporation duly organized, validly existing and in good standing
under the laws of the state of Delaware; (ii) the Company has all
requisite corporate power and authority to issue this Warrant and
to consummate the transactions contemplated hereby, and such
issuance and consummation will not conflict with, result in a
material breach of, constitute a material default under or material
violation of any provision of the Company's Certificate of
Incorporation or Bylaws, and to the best knowledge of the Company,
any law or regulation of any governmental authority or any
provision of any agreement, judgment or decree affecting the
Company; and (iii) all corporate action required to be taken by the
Company in connection with the execution and delivery of this
Warrant and the performance of the Company's obligations hereunder
has been taken.
5. Disposition of Warrants or Shares. The Holder acknowledges
that this Warrant and the Shares issuable upon exercise thereof
have not been registered under the Act or applicable state law.
The Holder agrees, by acceptance of this Warrant, (i) that no sale,
transfer or distribution of this Warrant or the Shares shall be
made except in compliance with the Act and the rules and
regulations promulgated thereunder, including any applicable
prospectus delivery requirements and the restrictions on transfer
set forth herein, and (ii) that if distribution of this Warrant or
any Shares is proposed to be made by it otherwise than by delivery
of a prospectus meeting the requirements of Section 10 of the Act,
such action shall be taken only after submission to the Company of
an opinion of counsel, reasonably satisfactory in form and
substance to the Company's counsel, to the effect that the proposed
distribution will not be in violation of the Act or of applicable
state law.
6. Adjustment. The number of Shares purchasable upon the
exercise of this Warrant and the Exercise Price per Share are
subject to adjustment from time to time as provided in this Section
6.
(a) Subdivision or Combination of Shares. If the Company
shall at any time subdivide its outstanding shares of Common Stock
into a greater number of shares (including a stock split effected
as a stock dividend) or combine its outstanding shares of Common
Stock into a lesser number of shares, the number of Shares issuable
upon exercise of this Warrant shall be adjusted to such number as
is obtained by multiplying the number of shares issuable upon
exercise of this Warrant immediately prior to such subdivision or
combination by a fraction, the numerator of which is the aggregate
number of shares of Common Stock outstanding immediately after
giving effect to such subdivision or combination and the
denominator of which is the aggregate number of shares of Common
Stock outstanding immediately prior to such subdivision or
combination, and the Exercise Price per Share shall be
correspondingly adjusted to such amount as shall, when multiplied
by the number of Shares issuable upon full exercise of this Warrant
(as increased or decreased to reflect such subdivision or
combination of outstanding shares of Common Stock, as the case may
be), equal the product of the Exercise Price per Share in effect
immediately prior to such subdivision or combination multiplied by
the number of Shares issuable upon exercise of this Warrant
immediately prior to such subdivision or combination.
(b) Effect of Sale, Merger or Consolidation. If any capital
reorganization or reclassification of the capital stock of the
Company, or consolidation or merger of the Company with another
corporation, or sale of all or substantially all of the Company's
assets to another corporation shall be effected after the date
hereof in such a way that holders of Common Stock shall be entitled
to receive stock, securities or assets with respect to or in
exchange for Common Stock, then, as a condition of such reorganiza-
tion, reclassification, consolidation, merger or sale, lawful and
adequate provision shall be made whereby the Holder shall
thereafter have the right to purchase and receive, upon the basis
and the terms and conditions specified in this Warrant and in lieu
of the Shares immediately theretofore purchasable and receivable
upon the exercise of this Warrant, such shares of stock, securities
or assets as may be issued or payable with respect to or in
exchange for a number of outstanding shares of Common Stock equal
to the number of shares of Common Stock immediately theretofore
purchasable and receivable upon the exercise of this Warrant, and
in any such case appropriate provision shall be made with respect
to the rights and interests of the Holder to the end that the
provisions of this Warrant (including, without limitation,
provisions for adjustments of the Exercise Price and of the number
of Shares issuable upon the exercise of this Warrant) shall
thereafter be applicable, as nearly as may be possible, in relation
to any shares of stock, securities or assets thereafter deliverable
upon the exercise of this Warrant. The Company shall not effect
any such consolidation, merger or sale unless prior to or
simultaneously with the consummation thereof the successor
corporation (if other than the Company) resulting from such
consolidation or merger or the corporation purchasing such assets
shall assume, by written instrument executed and delivered to the
Holder at its last address appearing on the books of the Company,
the obligation to deliver to the Holder such shares of stock,
securities or assets as, in accordance with the foregoing sentence,
the Holder may be entitled to purchase.
(c) Notice to Holder of Adjustment. Whenever the number of
Shares purchasable upon exercise of this Warrant or the Exercise
Price per Share is adjusted as herein provided, the Company shall
cause to be mailed to the Holder, in accordance with the provisions
of Section 10 hereof, notice setting forth the adjusted number of
Shares purchasable upon the exercise of the Warrant and the
adjusted Exercise Price and showing in reasonable detail the
computation of the adjustment and the facts upon which such
adjustment is based.
(d) Notices to Holder of Certain Events. If at any time
after the date hereof:
(i) the Company shall declare any dividend or other
distribution upon or with respect to the Common Stock payable
otherwise than in cash out of the consolidated net income of
the Company and any subsidiaries thereof, including any
dividend payable in shares of Common Stock or other securities
of the Company; or
(ii) the Company shall offer for subscription to
the holders of its Common Stock any additional shares of stock
of any class or any other securities convertible into stock or
any rights to subscribe thereto; or
(iii) there shall be any capital reorganization or
reclassification of the capital stock of the Company (other
than a change in par value, or from par value to no par value,
or from no par value to par value or as result of the
subdivision or combination of shares), or any conversion of
the Shares into securities of another corporation, or a sale
of all or substantially all of the assets of the Company, or
a consolidation or merger of the Company with another
corporation (other than a merger with a subsidiary in which
the Company is the continuing corporation and which does not
result in any reclassification or change of the Shares
issuable upon exercise of the Warrants); or
(iv) there shall be a voluntary or involuntary
dissolution, liquidation or winding up of the Company;
then, in any one or more of said cases, the Company shall cause to
be mailed to the Holder, not less than ten (10) days before any
record date or other date set for the definitive action, written
notice of the date upon which the books of the Company shall close
or a record shall be taken for purposes of such dividend,
distribution or subscription rights or upon which such
reorganization, reclassification, conversion, sale, consolidation,
merger, dissolution, liquidation or winding up shall take place, as
the case may be. Such notice shall also set forth facts as shall
indicate the effect of such action (to the extent such effect may
be known at the date of such notice) on the number of Shares and
the kind and amount of the shares of stock and other securities and
property deliverable upon exercise of the Warrants. Such notice
shall also specify the date as of which the holder of record of the
shares of Common Stock shall participate in said dividend,
distribution or subscription rights or shall be entitled to
exchange their shares of Common Stock for securities or other
property deliverable upon such reorganization, reclassification,
conversion, sale, consolidation, merger, dissolution, liquidation
or winding up, as the case may be (on which date in the event of
voluntary or involuntary dissolution, liquidation or winding up of
the Company, the right to exercise the Warrants shall terminate).
(e) Fractional Shares. The Company shall not be required to
issue any fraction of a Share upon the exercise of this Warrant.
The number of full Shares which shall be issuable upon the full or
partial exercise of this Warrant shall be computed on the basis of
the aggregate number of Shares as to which this Warrant is being
exercised. In lieu of any fractional interest in a Share otherwise
deliverable upon the exercise of this Warrant, the Company shall
pay a cash adjustment (which may be effected as a reduction of the
amount to be paid by the Holder upon such exercise) in respect of
such fraction of a Share in an amount equal to the same fraction
multiplied by the closing sales price of the Common Stock on the
principal securities exchange on which the Common Stock is traded,
or if the Common Stock is not so listed for trading, the closing
bid price of the Common Stock, in each case on the date of the
notice of exercise required pursuant to Section 1 above, or the
next succeeding trading date, if the date of such notice is not a
trading date, or if the Common Stock is not traded on such dates,
the next succeeding trading date on which the Common Stock is
traded.
(f) No Other Adjustments. No adjustment to the number of
Shares subject to this Warrant or the Exercise Price per Share
shall be made pursuant to this Section 6 except as expressly
provided herein.
7. Piggy-Back Registration.
(a) In the event the Company shall, at any time prior to the
expiration of this Warrant, file a registration statement with the
Securities and Exchange Commission (the "SEC") to register shares
of Common Stock, the Company shall furnish the Holders with at
least thirty (30) days' prior written notice thereof and such
Holders shall have the option to include the Shares to be issued to
the Holders upon the exercise of this Warrant in such registration
statement. The Holders shall exercise the "piggy-back registration
rights" granted pursuant to this Section 7 by giving written notice
to the Company within twenty (20) days of the receipt of the
aforementioned written notice from the Company.
(b) Notwithstanding any other provision of this Warrant, the
Company's obligations under this Section 7 shall be subject to and
limited by the following terms and conditions:
(i) The obligations of the Company set forth under this
Section 7 shall not arise upon the filing of a registration
statement relating solely to shares of Common Stock issued pursuant
to employee stock option or other benefit plans, a merger of other
business combination or a registration statement which does not
include substantially the same information as Form S-1, Form S-2 or
Form S-3, or any successor forms thereto.
(ii) If the Company files a registration statement in
connection with a proposed underwritten primary or secondary public
offering of Common Stock, the Company shall use its best efforts to
cause the managing underwriter of the proposed offering to grant
any request by the Holder that Shares purchased by the Holder upon
the exercise of this Warrant be included in the proposed public
offering on terms and conditions which are customary under industry
practice. Notwithstanding any other provision of this Agreement,
if the managing underwriter of a proposed primary or secondary
public offering of the Common Stock gives written notice to the
Company that, in the reasonable opinion of such managing
underwriter, marketing factors require a limitation of the total
number of shares of Common Stock to be underwritten, then the
number of Shares purchased by the Holder upon the exercise of this
Warrant which the Company shall be obligated to include in the
registration statement shall be reduced in accordance with the
limitations imposed by the managing underwriter. Any such
limitation imposed by the managing underwriter shall be imposed pro
rata among all holders of Common Stock exercising rights granted
pursuant to this Section 7 or otherwise, in accordance with the
amount of Common Stock which each such person requested to be
included in the registration statement.
(c) The Company will pay all Registration Expenses (as
hereinafter defined) of all registrations under this Warrant;
provided, however, that if a registration is withdrawn at the
request of the Holders requesting such registration (other than as
a result of information concerning the business or financial
condition of the Company which is made known to the Holders after
the date on which such registration was requested), each of the
Holders shall pay the Registration Expenses of such registration
pro rata in accordance with the number of its Shares included in
such registration. For purposes of this Section 7, the term
"Registration Expenses" shall mean all expenses incurred by the
Company in complying with this Section 7, including, without
limitation, all registration and filing fees, exchange listing
fees, printing expenses, fees and disbursements of counsel for the
Company, state Blue Sky fees and expenses, transfer agent fees,
cost of engraving of stock certificates, costs for mailing and
tombstone advertising, cost of preparing the registration
statement, related exhibits, amendments and supplements thereto,
underwriting documents, selected dealer agreements, preliminary and
final prospectuses, and the expense of any special audits incident
to or required by any such registration, but excluding underwriting
discounts and selling commissions attributable to the Shares and
the fees and expenses of the Holder's own counsel and accountants,
which shall be borne by such holders.
8. Indemnification and Notification.
(a) The Company will indemnify and hold harmless the Holders,
and each person, if any, who controls such Holders within the
meaning of Section 15 of the Act, from and against any and all
losses, claims, damages, expenses and liabilities caused by any
untrue statement of a material fact contained in any registration
statement or contained in a prospectus furnished thereunder or
caused by any omission to state a material fact therein necessary
to make the statement therein not misleading, provided, however,
that the foregoing indemnification and agreement to hold harmless
shall not apply insofar as such losses, claims, damages, expenses
and liabilities are caused by any such untrue statement or
omissions based upon information furnished in writing to the
Company by any such Holder expressly for use in any registration
statement or prospectus.
(b) The Holders will indemnify the Company, and each person
who controls the Company within the meaning of Section 15 of the
Act, from and against any and all losses, claims, damages, expenses
and liabilities caused by an untrue statement of a material fact
contained in any registration statement or contained in a
prospectus furnished thereunder or caused by an omission to state
a material fact therein necessary to make the statement therein not
misleading insofar as such losses, claims, damages, expenses and
liabilities caused by such untrue statement or omission based upon
information furnished in writing to the Company by any such Holder
expressly for use in any registration statement or prospectus.
(c) Promptly after the receipt by any indemnified party of
notice of the commencement of any action, said indemnified party
will, if a claim in respect thereof is to be made against the
indemnifying party under this Section 8, notify the indemnifying
party in writing of the commencement thereof; but the omission to
so notify the indemnifying party will not relieve it from any
liabilities which it may have to them otherwise than under this
Section 8, except if such delay prejudices the indemnifying party.
In case any such action is brought against any party who may seek
indemnification hereunder and the indemnifying party is notified of
the commencement thereof as provided herein, the indemnifying party
will be entitled to participate in, and, to the extent that it may
wish, to assume the defense thereof, with counsel satisfactory to
the indemnified party, and after notice from the indemnifying party
to such indemnified party of the indemnifying party's election so
to assume the defense thereof, the indemnifying party will not be
liable under this Section 8 for any legal or other expense
subsequently incurred by such indemnified party in connection with
the defense thereof other than reasonable costs of investigation.
The indemnifying party will not be liable for any settlement
effected without its written consent.
9. Survival. The various rights and obligations of the Holder
and of the Company as set forth in Sections 4, 5, 6, 7 and 8 hereof
shall survive the exercise of this Warrant and the surrender of
this instrument upon such exercise.
10. Notice. All notices required by this Warrant to be given or
made by the Company shall be given or made by first class mail,
postage prepaid, addressed to the registered holder hereof at the
address of such holder as shown on the books of the Company.
11. Loss or Destruction. Upon receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or
mutilation of this Warrant and, in the case of any loss, theft or
destruction, upon delivery of an indemnity agreement reasonably
satisfactory in form and amount to the Company and its counsel, or,
in the case of any such mutilation, upon surrender and cancellation
of this Warrant, the Company, at its expense, will execute and
deliver, in lieu thereof, a new Warrant of like tenor.
12. Miscellaneous.
(a) Neither this Warrant nor any term hereof may be changed,
waived, discharged or terminated except by a written instrument
executed by the Company and the Holder.
(b) This Warrant shall be governed by, and construed and
enforced in accordance with, the internal laws of the State of
Florida, without regard to principles of conflicts of laws thereof.
(c) Each provision of this Warrant shall be interpreted in
such a manner as to be effective, valid and enforceable under
applicable law, but if any provision of this Warrant is held to be
invalid, illegal or unenforceable under any applicable law or rule
in any jurisdiction, such provision will be ineffective only to the
extent of such invalidity, illegality or unenforceability in such
jurisdiction, without invalidating the remainder of this Warrant in
such jurisdiction or any provision hereof in any other
jurisdiction.
(d) No course of dealing or delay or failure to exercise any
right hereunder on the part of the Holder shall operate as a waiver
of such right or otherwise prejudice the Holder's rights, power or
remedies.
(e) The Company shall pay all expenses incurred by it in
connection with, and all documentary stamp and other taxes (other
than stock transfer taxes) and other governmental charges that may
be imposed in respect of, the issue, sale and delivery of this
Warrant and the Shares issuable upon the exercise hereof.
(f) This Warrant and the rights evidenced hereby shall inure
to the benefit of and be binding upon the successors and assigns of
the Company and the successors and permitted assigns of the Holder.
IN WITNESS WHEREOF the Company has caused this Warrant to be
executed by its duly authorized officer as of the date first above
written.
ATTEST: nSTOR TECHNOLOGIES, INC.
By:________________________ By:_________________________
Name: _____________________ Name:_______________________
Title:_____________________ Title:______________________
ASSIGNMENT
To be executed by the registered holder to effect a permitted
transfer of the within Warrant. Capitalized terms have the same
meanings ascribed to them in the within Warrant.
FOR VALUE RECEIVED ______________________________
("Assignor")
hereby sells, assigns and transfers unto
___________________________________________("Assignee")
(Name)
___________________________________________
(Address)
___________________________________________
the right to purchase __________ shares of Common Stock of nStor
Technologies, Inc. evidenced by the within Warrant, together with
all right, title and interest therein, and does irrevocably
constitute and appoint _____________________________ attorney to
transfer the said right on the books of said corporation with full
power of substitution in the premises.
In satisfaction of a condition to the effectiveness of this
assignment, Assignor hereby certifies that Assignee is a
corporation controlled by or under common control with Assignor.
Date: ____________________ Assignor:
By_________________________
Its_________________________
Signature:__________________
PURCHASE FORM
To be executed upon exercise of the within Warrant.
Capitalized terms have the same meanings ascribed to them in the
within Warrant.
TO: nStor Technologies, Inc.
The undersigned hereby exercises the right to purchase
_____________ Shares of Common Stock evidenced by the within
Warrant, according to the terms and conditions thereof, and hereby
makes payment of the Purchase Price. The undersigned requests that
certificates for the Shares shall be issued in the name set forth
below:
Dated:________________ Name:_____________________
__________________________
(Address)
__________________________
Social Security No.
__________________________
or other identifying number
Exhibit 10.1
ALL INDEBTEDNESS EVIDENCED HEREBY AND REFERENCED HEREIN IS SUB-
ORDINATED IN RIGHT OF PAYMENT TO THE PRIOR PAYMENT IN FULL OF ALL
INDEBTEDNESS OWED TO FINOVA CAPITAL CORPORATION.
PROMISSORY NOTE
U.S. $500,000.00 March 15, 1999
Lawrence, New York
FOR VALUE RECEIVED, the undersigned nSTOR TECHNOLOGIES, INC., a
Delaware corporation with its principal place of business at 450
Technology Park, Lake Mary, Florida 32746 (hereinafter called
"Maker"), hereby promises to pay to the order of Maurice Halperin,
an individual resident of the State of Florida, with a business
address at Suite 225, 2500 Military Trail North, Boca Raton,
Florida 33431 (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 FIVE
HUNDRED THOUSAND AND 00/100ths U.S. Dollars (U.S. $500,000.00) (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 June 15, 1999.
Upon the failure by Maker to pay the Principal Amount plus all
accrued interest thereon in full on or before the date when due
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.
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.
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/ Michael L. Wise
By:________________________
Name: Michael L. Wise
Title: Vice President
Exhibit 10.2
ALL INDEBTEDNESS EVIDENCED HEREBY AND REFERENCED HEREIN IS SUB-
ORDINATED IN RIGHT OF PAYMENT TO THE PRIOR PAYMENT IN FULL OF ALL
INDEBTEDNESS OWED TO FINOVA CAPITAL CORPORATION.
PROMISSORY NOTE
U.S. $1,000,000.00 March 1, 1999
Lawrence, New York
FOR VALUE RECEIVED, the undersigned nSTOR TECHNOLOGIES, INC., a
Delaware corporation with its principal place of business at 450
Technology Park, Lake Mary, Florida 32746 (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
(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 May
31, 1999.
It is expressly agreed that this Promissory Note evidences a ONE
MILLION and 00/100ths U.S. Dollars (U.S.$1,000,000.00) revolving
line of credit. The Principal Amount which may be outstanding at
any time under such line of credit shall not exceed ONE MILLION and
00/100ths U.S. Dollars (U.S.$1,000,000.00). However, this
limitation shall not be deemed to prohibit Payee from advancing any
sum which may, in Payee's sole and exclusive discretion, be
necessary or desirable in order to protect and preserve the effect
and enforceability of this Promissory Note. Within the limits and
subject to the terms and conditions hereof, the Maker may borrow,
repay and reborrow under the revolving line of credit evidenced by
this Promissory Note and all shall be subject to the terms and
conditions of this Promissory Note.
Upon the failure by Maker to pay the Principal Amount plus all
accrued interest thereon in full on or before the date when due
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.
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.
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/ Michael L. Wise
By:________________________
Name: Michael L. Wise
Title: Vice President
EXHIBIT 10.3
ALL INDEBTEDNESS EVIDENCED HEREBY AND REFERENCED HEREIN IS
SUBORDINATED IN RIGHT OF PAYMENT TO THE PRIOR PAYMENT IN FULL OF
ALL INDEBTEDNESS OWED TO FINOVA CAPITAL CORPORATION.
FORM OF
PROMISSORY NOTE
U.S. $__________ January 29, 1999
Lawrence, New York
FOR VALUE RECEIVED, the undersigned nSTOR TECHNOLOGIES, INC.,
a Delaware corporation with its principal place of business at 450
Technology Park, Lake Mary, Florida 32746 (hereinafter called
"Maker"), hereby promises to pay to the order of _________________,
an individual resident of the State of _________, with an address
at _______________________________________________ (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 SIX HUNDRED THOUSAND DOLLARS and
00/100ths U.S. Dollars (U.S. $__________) (the "Principal Amount"),
plus interest on the outstanding balance of the Principal Amount at
the rate of eight percent (8%) 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, 2000.
Upon the failure by Maker to pay the Principal Amount plus all
accrued interest thereon in full on or before the date when due
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.
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.
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/ Michael L. Wise
By:________________________
Name: Michael L. Wise
Title: Vice President
EXHIBIT 10.8
EMPLOYMENT AGREEMENT
THIS AGREEMENT ("Agreement") dated as of June 1, 1998, is
entered into by and between nSTOR TECHNOLOGIES, INC., a Delaware
corporation (the "Company"), and Larry Steffan (the "Executive").
Recitals
The Company, through its Board of Directors, desires to retain
the services of Executive, and Executive desires to be retained by
the Company, on the terms and conditions set forth in this
Agreement.
Agreement
For and in consideration of the foregoing and of the mutual
covenants of the parties herein contained, and for other good and
valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties agree as follows:
1. EMPLOYMENT. The Company hereby employs Executive to serve in
the capacities described herein and Executive hereby accepts such
employment and agrees to perform the services described herein upon
the terms and conditions hereinafter set forth.
2. TERM. The term of Executive's employment pursuant to this
Agreement shall commence as of the date hereof and shall terminate
at the close of business on June 1, 2001, subject to earlier
termination in accordance the other terms and conditions set forth
herein.
3. DUTIES. Executive shall serve as and have the title of the
President of the Company and President of nStor Corporation, a
wholly-owned subsidiary of the Company ("nStor"), shall serve on
the Board of Directors of nStor and, subject to the approval of the
Company's shareholders, shall serve on the Company's Board of
Directors. The Executive's principal place of employment shall be
Lake Mary, Florida. Executive agrees to devote his full business
time, energy, skills and best efforts to such employment while so
employed. Nothing in this Agreement shall preclude Executive from
engaging, so long as, in the reasonable determination of the board
of directors of the Company (the "Board of Directors"), such
activities do not interfere with his duties and responsibilities
hereunder, in charitable and community affairs, from managing any
passive investment made by him or from serving, subject to the
prior approval of the Board of Directors, as a member of the board
of directors or as a trustee of any other corporation, association
or entity.
4. COMPENSATION.
(a) Base Compensation. The Company shall pay Executive, and
Executive agrees to accept, base compensation at the rate of
$200,000 per year, payable bi-weekly, through the term of this
Agreement ("Base Compensation"). The Base Compensation specified
in this Section 4(a) shall be increased to $250,000 per year on
January 1, 1999. Base Compensation may also be increased annually
during the term of this Agreement in the sole discretion of the
Board of Directors.
(b) Bonus Compensation.
(i) Solely in the event that the Company has a net increase in
cash and cash equivalents as a result of income from operations,
and not as a result of any cash or capital infusion from a third
party, during any consecutive three month period during the period
commencing July 1, 1998 and ending December 31, 1998, the Company
shall pay Executive a one-time bonus in the amount of $25,000
within 30 days following the preparation of financial statements
for such three-month period.
(ii) Subject to the attainment by the Company of certain goals
to be established by the Company's Board of Directors for fiscal
year 1999 and each fiscal year during the term of this Agreement
thereafter, the Board of Directors may, in its sole discretion,
grant Executive an annual cash bonus.
(c) Stock Options. The Company shall grant Executive an
option (the "Option") to purchase 750,000 shares of the common
stock, par value $.05 per share, of the Company ("Common Stock") on
terms set forth in the Stock Option Agreement by and between the
Company and the Executive of even date herewith.
5. FRINGE BENEFITS.
(a) Generally. Executive shall be eligible for fringe
benefits pursuant to any insurance, pension or other employee
fringe benefit plan approved by the Board of Directors that now or
hereafter may be made available to employees of the Company and for
which Executive will qualify according to his eligibility under the
provisions thereof.
(b) Health and Disability Insurance. Executive shall be
entitled to participate in such health insurance plans that the
Company offers to other executive officers of the Company from time
to time, provided that such participation shall not exclude any
pre-existing conditions with respect to the Executive or his
family. The Company shall provide Employee with disability
insurance covering [ ].
(c) Life Insurance. The Company shall provide Employee
with $1 million of term insurance and allow the Employee to
designate the beneficiary of such policy.
(d) Flex Days. During the term of this Agreement, Executive
shall be entitled to twenty-one (21) flex days per year which
Executive may use for vacation, holidays, illness or any other
purpose.
(e) Relocation Expenses. Executive shall be reimbursed for:
(i) all reasonable moving expenses, including packing and unpacking
costs, incurred in connection with Executive's relocation from Boca
Raton, Florida to the Greater Orlando area of Florida; and (ii)
reasonable temporary housing expenses for a period not to exceed
one year.
6. EXPENSES. The Executive shall be reimbursed for all usual
expenses incurred on behalf of the Company, in accordance with
Company practices and procedures, provided that:
(a) Each such expenditure is of a nature deductible under
Section 162 of the Internal Revenue Code of 1986, as amended (the
"Code") on the Federal income tax return of the Company as a
business expense and not as deductible compensation to Executive;
and
(b) Executive furnishes the Company with adequate documentary
evidence required by the Code or any regulation promulgated
thereunder for the substantiation of such expenditures as a
deductible business expense of the Company and not as deductible
compensation to Executive.
7. TERMINATION. The term of Executive's employment under this
Agreement may be terminated prior to expiration of the term
provided in Section 2 hereof in accordance with the following
paragraphs.
(a) For Cause. This Agreement may be immediately terminated
by the Company for Cause (as herein defined) and, upon thirty (30)
days written notice to Executive, without Cause, for any reason or
for no reason. For purposes of this Agreement, the term "Cause"
shall mean the termination of the Executive by the Board of
Directors of the Company as a result of the existence or occurrence
of one or more of the following conditions or events:
(i) a material breach by the Executive of any provision of
this Agreement, or the willful and continued failure of Executive
substantially to perform his duties under his employment with the
Company;
(ii) Executive's willful misconduct or gross negligence in
connection with the performance of his duties as an employee or
officer of the Company;
(iii) performance by the Executive of any act of fraud or
material misrepresentation or a material act of misappropriation
which results or is intended to result in Executive's personal
enrichment at the expense of the Company;
(iv) conviction of the Executive of any crime which
constitutes either (i) a felony offense involving violence (but not
involving a motorized vehicle) or fraud, embezzlement, theft or
business activities, or (ii) a misdemeanor involving fraud,
embezzlement or theft in the United States or which, if it had been
committed in the United States, would constitute either a felony
offense involving violence or fraud, embezzlement, theft or
business activities or a misdemeanor involving fraud, embezzlement
or theft in the United States;
(v) violation by the Executive of any law which results in
the entry of a judgment or order enjoining or preventing the
Executive from such activities as are essential for the Executive
to perform his services as required by this Agreement; or
(vi) a good faith determination by the Board of Directors that
Executive has engaged in conduct or activities materially damaging
to the business of the Company, monetarily or otherwise, it being
understood that neither conduct or activities pursuant to the
Executive's exercise of his good faith business judgment nor
unintentional physical damage to properties by the Executive shall
be a ground for such a determination.
(b) Executive. Executive may voluntarily terminate his
employment hereunder upon thirty (30) days written notice to the
Company.
(c) Mutual. Executive's employment under this Agreement may
be terminated upon mutual written agreement of the Company and the
executive.
(d) Death. In the event of the death of Executive, this
Agreement shall terminate immediately.
(e) Disability. If, during Executive's employment under this
Agreement, Executive shall become permanently disabled and unable
to perform his duties as required herein ("Disability") for a
consecutive period of one hundred eighty (180) days, or, after
being disabled, an expert medical opinion is furnished to the
Company that Executive will be unable to perform his or her duties
for six (6) months, then the Company may, upon thirty (30) days
written notice to Executive, terminate Executive's employment under
this Agreement.
(f) Change of Control. In the event that following a "Change
in Control" (as defined in this Section 7(f)): (i) Executive's job
description, responsibilities and authority is substantially
reduced and as a result, Executive elects to voluntarily resign his
employment with the Company; or (ii) Employee is terminated by the
Company, all options to purchase Common Stock granted to Executive
shall immediately vest. Termination of Executive's employment
under this Agreement pursuant to the provisions of the preceding
sentence shall be deemed to be a voluntary resignation or
termination by Executive and shall not be deemed a termination
without Cause for purposes of Section 9 hereof. For purposes of
this Agreement, a "Change in Control" shall be deemed to have
occurred when:
(i) there occurs any transaction (which shall include a
series of transactions occurring within sixty (60) days) that has
the result that shareholders of the Company immediately before such
transaction cease to own at least fifty-one percent (51%) of the
voting stock of the Company or any entity that results from the
participation of the Company in a merger, reorganization,
consolidation, liquidation or any other form of corporate
transaction;
(ii) the shareholders of the Company approve a plan of merger,
consolidation, reorganization, liquidation or dissolution in which
the Company does not survive (unless the approved merger,
consolidation, reorganization, liquidation or dissolution is
subsequently abandoned);
(iii) the Company disposes of all or substantially all of its
assets; or
(iv) a majority or more of the directors nominated by the
Board of Directors to serve as directors, each having agreed to
serve in such capacity, fail to be elected in a contested election
of directors.
8. DEATH AND DISABILITY. In the event of the termination of
Executive's employment under this Agreement by reason of the
Executive's death or Disability, in addition to any insurance
benefits provided pursuant to the provisions of Section 5 of this
Agreement, the Company shall pay Executive (or his heirs and/or
personal representatives), Base Compensation through the date of
death or the date of termination for Disability as provided in
Paragraph 7(e), respectively.
9. SEVERANCE. In the event of the termination of Executive's
employment under this Agreement for any reason other than
Executive's death or Disability, the Company shall provide the
payments and benefits to Executive as indicated below:
(a) For Cause, Voluntary Termination or Following a Change of
Control. If Executive is terminated for Cause (as defined in
Section 7(a) of this Agreement), Executive voluntarily terminates
his employment with the Company, or Executive is terminated or
resigns following a Change of Control for any reason whatsoever,
the Company shall be obligated only to continue to pay to Executive
his Base Compensation, if any, earned up to the date of termination
and shall reimburse the Executive for any expenses to which the
Executive is due reimbursement by the Company under Section 6
hereof. In addition, the Company shall pay any vested benefits, if
any, owed to Executive under any plan provided for Executive under
Paragraph 5 hereof in accordance with the terms of such plan as in
effect on the date of termination of employment under this
Paragraph 9.
(b) Without Cause. If the Company terminates this Agreement
without Cause, Executive shall continue to receive the Base
Compensation in effect on the date of such termination until the
date twelve (12) months from the date of termination under this
Agreement and shall reimburse the Executive for any expenses to
which the Executive is due reimbursement by the Company under
Section 6 hereof. In addition, the Company shall pay any vested
benefits, if any, owed to Executive under any plan provided for
Executive under Paragraph 5 hereof in accordance with the terms of
such plan as in effect on the date of termination of employment
under this Paragraph 9.
10. CONFIDENTIAL INFORMATION. Executive recognizes and
acknowledges that he will have access to certain confidential
information of the Company and of corporations with whom the
Company does business, and that such information constitutes
valuable, special and unique property of the Company and such other
corporations. During the term of this Agreement and for a period
of five (5) years immediately following the date of termination of
this Agreement, Executive agrees not to disclose or use any
confidential information, including without limitation, information
regarding research, developments, product designs or
specifications, manufacturing processes, "know-how," prices,
suppliers, customers, costs or any knowledge or information with
respect to confidential or trade secrets of the Company, it being
understood that such confidential information does not include
information that is publicly available unless such information
became publicly available as a result of a breach of this
Agreement. Executive acknowledges and agrees that all notes,
records, reports, sketches, plans, unpublished memoranda or other
documents belonging to the Company, but held by Executive,
concerning any information relating to the Company's business,
whether confidential or not, are the property of the Company and
will be promptly delivered to it upon Executive's leaving the
employ of the Company. Executive also agrees to execute such
confidentiality agreements that the Board may adopt, and may modify
from time to time, as a standard form to be executed by all
employees of the Company, to the extent such standard forms are not
materially more restrictive than the provisions of this Agreement.
11. NON-SOLICITATION. At all times during the term of this
Agreement and three (3) years thereafter, Executive shall not,
directly or indirectly, induce, influence, combine or conspire
with, or attempt to induce, influence, combine or conspire with,
any of the officers, employees, agents or consultants of the
Company to terminate their employment, or other relationship, with
or compete against the Company or any future subsidiaries, parents
or affiliates of the Company in the business of selling,
distributing, installing and/or servicing microcomputers,
peripherals, components and/or accessories, microcomputer software
products, and custom-designed microcomputer systems (the
"Business").
12. NON-COMPETITION. Executive acknowledges that his services and
responsibilities are unique in character and are of particular
significance to the Company, that the Company engages in a
competitive business with a national market and that Executive's
continued and exclusive service to the Company under this Agreement
is of a high degree of importance to the Company. Therefore,
during the term of this Agreement and for a period of three (3)
years thereafter (the "Noncompete Period"), Executive shall not,
directly or indirectly, engage in the Business, or in any other
business which, at the time of Executive's termination, the Company
is actively engaged or plans to engage in (the "Future Business"),
except as an employee or agent of the Company, and shall not,
directly or indirectly, as owner, partner, joint venturer,
employee, broker, agent, corporate officer, principal, licensor,
shareholder (unless as owner of no more than five percent (5%) of
the issued and outstanding capital stock of such entity if such
stock is publicly traded) or in any other capacity whatsoever,
engage in or have any connection with any business which is
competitive with the Business or any Future Business, and which
operates anywhere in the United States. In the event Executive is
terminated by the Company without Cause prior to the expiration of
the term of this Agreement, the Noncompete Period shall be modified
such that it expires on the date of such involuntary termination.
13. RESTRICTIVE COVENANTS.
(a) If, in any judicial proceedings, a court shall refuse to
enforce any of the covenants included in Paragraphs 10, 11 or 12
hereof, then such unenforceable covenant shall be amended to relate
to such lesser period or geographical area as shall be enforceable.
In the event the Company should bring any legal action or other
proceeding against Executive for enforcement of this Agreement, the
calculation of the Noncompete Period, if any, shall not include the
period of time commencing with the filing of legal action or other
proceeding to enforce this Agreement through the date of final
judgment or final resolution, including all appeals, if any, of
such legal action or other proceeding unless the Company is
receiving the practical benefits of this Paragraph 9 during such
time. The existence of any claim or cause of action by Executive
against the Company predicated on this Agreement shall not
constitute a defense to the enforcement by the Company of these
covenants.
(b) Executive hereby acknowledges that the restrictions on
his activity as contained in this Agreement are required for the
Company's reasonable protection and is a material inducement to the
Company to enter into this Agreement. Executive hereby agrees that
in the event of the violation by him of any of the provisions of
this Agreement, the Company will be entitled to institute and
prosecute proceedings at law or in equity to obtain damages with
respect to such violation or to enforce the specific performance of
this Agreement by Executive or to enjoin Executive from engaging in
any activity in violation hereof. The prevailing party in any
litigation brought to enforce the restrictive provisions contained
in this Agreement shall be entitled to reimbursement from the
nonprevailing party for reasonable attorneys' fees and expenses
incurred in connection with such litigation.
(c) Notwithstanding anything to the contrary contained
herein, in the event that Executive engages in any conduct
prohibited by Paragraphs 10, 11 or 12 hereof for any reason
whatsoever, Executive shall not receive any of the severance
benefits he otherwise would be entitled to receive pursuant to
Paragraph 9 hereof.
14. ARBITRATION. All disputes arising under this Agreement shall
be resolved through binding arbitration. The arbitrator shall be
selected by the American Arbitration Association and the
arbitration shall be conducted in Palm Beach County, Florida, in
accordance with the then-prevailing rules of the American
Arbitration Association. The decision rendered by the arbitrator
shall be binding upon the parties and judgment upon the decision or
award may be entered in any court of competent jurisdiction. All
costs of arbitration and reasonable attorneys' fees shall be paid
by the non-prevailing party. If neither party substantially
entirely prevails, the arbitrator by shall apportion the costs and
reasonable attorneys' fees.
15. NOTICES. Any notice required or permitted to be given under
this Agreement shall be sufficient if in writing and if sent by
registered mail to the addresses below or to such other address as
either party shall designate by written notice to the other:
If to the Executive: To the address set forth below his
signature on the signature page hereof.
If to the Company:
nStor Technologies, Inc.
100 Century Boulevard
West Palm Beach, Florida 33417
Attention: H. Irwin Levy
16. ENTIRE AGREEMENT; MODIFICATION.
(a) This Agreement contains the entire agreement of the
Company and Executive, and the Company and Executive hereby
acknowledge and agree that this Agreement supersedes any prior
statements, writings, promises, understandings or commitments
between the parties hereof.
(b) No future oral statements, promises or commitments with
respect to the subject matter hereof, or other purported
modification hereof, shall be binding upon the parties hereto
unless the same is reduced to writing and signed by each party
hereto.
17. ASSIGNMENT. The rights and obligations of the Company under
this Agreement shall inure to the benefit of and shall be binding
upon the successors and assigns of the Company. The Executive may
not assign his rights and obligations under this Agreement.
18. MISCELLANEOUS.
(a) This agreement shall be subject to and governed by the
laws of the State of Delaware, without regard to the conflicts of
laws principles thereof.
(b) The section headings contained herein are for reference
purposes only and shall not in any way affect the meaning or the
interpretation of this Agreement.
(c) The failure of any party to enforce any provision of
this Agreement shall in no manner affect the right to enforce the
same, and the waiver by any party of any breach of any provision
of this Agreement shall not be construed to be a waiver by such
party of any succeeding breach of such provision or a waiver by
such party of any breach of any other provision.
(d) All written notices required in this Agreement shall be
sent postage prepaid by certified or registered mail, return
receipt requested.
(e) In the event any one or more of the provisions of this
Agreement shall for any reason be held invalid, illegal or
unenforceable, the remaining provisions of this Agreement shall
be unimpaired, and the invalid, illegal or unenforceable
provision shall be replaced by a mutually acceptable valid, and
enforceable provision which comes closest to the intent of the
parties.
(f) This Agreement may be executed in any number of
counterparts, each of which shall constitute an original and all
of which together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have executed this
Employment Agreement as
of the day and year first above written.
nSTOR TECHNOLOGIES, INC.
/S/ Mark F. Levy
By: _____________________________
Its: Vice President
EXECUTIVE
/S/ Larry Steffann
_________________________________
Larry Steffan
Address:
___________________________
___________________________
EXHIBIT 10.9
EMPLOYEE INCENTIVE STOCK OPTION AGREEMENT
THIS AGREEMENT, made as of the 1st day of June, 1998 by and
between nStor Technologies, Inc., a Delaware corporation (the
"Company"), and Lawrence F. Steffann (the "Optionee").
W I T N E S S E T H:
WHEREAS, the Company has established and adopted its 1996
Stock Option Plan (the "Plan"), pursuant to which it may grant
options to purchase shares of its common stock, $.05 par value per
share (the "Common Stock"), to its employees;
WHEREAS, Optionee is an employee of the Company and has been
granted options to purchase shares of Common Stock; and
WHEREAS, Optionee and the Company desire to establish the
terms and conditions of such options in this Agreement;
NOW, THEREFORE, in consideration of the mutual covenants set
forth herein, and other good and valuable consideration, the
receipt and adequacy of which is hereby acknowledged, the parties
hereto agree as follows:
1. Grant of Option.
A. Subject to and upon the terms and conditions set forth in
this Agreement, the Company hereby grants to Optionee an Incentive
Stock Option (sometimes hereinafter referred to as "Option") to
purchase Seven Hundred Fifty Thousand (750,000) shares (the "Option
Shares") during the specified term of this Option, at a price equal
to One Dollar and Twenty Cents ($1.20) per share, which price is
equal to or greater than the current market value per share. This
Option is granted pursuant to the terms and conditions of the Plan,
all of which terms and conditions are hereby incorporated by
reference into this Agreement.
B. Notwithstanding anything to the contrary in this
Agreement, the grant of this Option is subject to obtaining the
approval of the shareholders of the Company, at the 1999 Annual
Meeting of Shareholders, for an amendment to the Plan to increase
the number of shares reserved for issuance under the Plan to at
least _____ million shares of Common Stock (the "Plan Amendment").
In the event that the Plan Amendment is not approved by the
shareholders at the 1999 Annual Meeting of Shareholders, the grant
of this Option shall be null and void to the extent that the Option
Shares exceed the number of shares available for issuance under the
Plan of the date hereof.
2. Specified Term; Time of Exercise. This Option shall vest
and shall be exercisable, subject to the provisions of Section 7
hereof, in the following amounts and on the following dates:
December 1, 1998--125,000 options; June 1, 1999--125,000 options;
December 1, 1999--125,000 options; June 1, 2000--125,000 options;
December 1, 2000--125,000 options; and June 1, 2001--125,000
options. All Options shall expire and terminate on the date ten
(10) years from the date hereof. While exercisable, Optionee may
exercise all or any portion of this Option.
3. Transferability of Option. This Option shall not be
transferable by the Optionee other than at death, and this Option
is exercisable during the Optionee's lifetime only by the Optionee.
4. Termination of Employment. If Optionee ceases to be
employed by the Company (or any of its subsidiaries) for any reason
other than death or permanent and total disability, then all rights
with respect to any then exercisable Option Shares shall terminate
after the expiration of a period of three (3) months from the date
of termination. If Optionee's employment is terminated as a result
of death or "permanent and total disability" (as defined in Section
22(e)(3) of the Internal Revenue Code of 1986, as amended), then
all Option Shares which would have otherwise vested and become
exercisable in the one (1) year period following such event shall
continue to so vest and become exercisable as so scheduled and,
together with any previously exercisable Option Shares, shall be
exercisable for the lesser of: (i) the remaining term of the Option
or (ii) one (1) year from the date of termination of Optionee's
employment as a result of death or "permanent and total
disability". Notwithstanding any to the contrary set forth herein,
if Optionee shall (i) commit any act of malfeasance or wrongdoing
affecting the Company, (ii) breach any covenant not to compete or
employment agreement with the Company, or (iii) engage in conduct
that would warrant the Optionee's discharge for cause, any
unexercised part of the Option shall lapse immediately upon the
earlier of the occurrence of such event or the last day Optionee is
employed by or affiliated with the Company.
5. Adjustment in the Event of Change in Capital Structure,
Reorganization, Anti-Dilution or Accounting Changes. In the event
of a change in the corporate structure or shares of the Company,
subject to any required action by the shareholders, the Company
shall make such equitable adjustments with respect to dilution or
accretion as it may deem appropriate in the number, kind and in the
exercise price of the unexercised Option Shares granted by this
Agreement. For purposes of this section, a change in the corporate
structure or shares of the Company shall include, but is not
limited to, changes resulting from a recapitalization, stock split,
reverse split, consolidation, rights offering, stock dividend,
reorganization or liquidation. This Agreement shall not in any way
affect the right of the Company to make changes in its capital
structure including, without limitation, the issuance of any
additional shares of any class of its capital stock, or to merge or
dissolve, liquidate or sell all or any part of its business or
assets. In no event shall Optionee be entitled to any adjustments
as a result of the issuance of any additional shares of any class
of the Company's capital stock where the consideration received by
the Company is equal to or greater than the fair market value of
such shares, as reasonably determined by the Board of Directors of
the Company.
6. Privilege of Stock Ownership. Optionee shall not be
deemed to be the holder of, or to have any of the rights of a
holder with respect to, any Option Shares unless and until the
Option shall have been exercised pursuant to the terms hereof, the
Company shall have issued and delivered the shares to Optionee, and
Optionee's name shall have been entered as a stockholder of record
on the books of the Company. Thereupon, Optionee shall have full
voting and other ownership rights with respect to such shares.
7. Manner of Exercising Option.
A. This Option may be exercised only as to whole shares and
only by written notice signed by Optionee (or in the case of
exercise after Optionee's death or disability, by Optionee's legal
representative, executor, administrator, heir or legatee, as the
case may be) and mailed or delivered to the President or Secretary
of the Company at its principal office, which notice shall: (i)
specify the number of Option Shares with respect to which the
Option is being exercised; (ii) be accompanied by payment in full
in cash; (iii) if the shares of Common Stock issuable upon exercise
of the Option are not then covered by a current registration
statement of the Company under the Securities Act of 1933, as
amended (the "Securities Act"), include a statement to the effect
that Optionee, or other person exercising the Option, is purchasing
the Option Shares for investment and not with a view to, or for
sale in, any distribution thereof; and (iv) if the Option is being
exercised by a person or persons other than Optionee, be
accompanied by proof satisfactory to the Company and its counsel,
that such person or persons have the right to exercise the Option.
Prior to the issuance of the Option Shares hereunder, Optionee
shall execute and deliver to the Company such other representations
in writing as may be reasonably requested by the Company in order
for it to comply with the applicable requirements of Federal and
state securities laws.
B. This Option shall be deemed to have been exercised with
respect to the Option Shares specified in said notice at the time
of receipt by the Company of: (i) the notice specified in Section
7(A) hereof; (ii) any representations reasonably required by the
Company pursuant to Section 7(A) hereof; and (iii) the payment
required in Section 7(A) hereof.
C. Unless the shares of Common Stock issuable upon exercise
of the Option are covered by a then current registration statement
of the Company under the Securities Act, the certificates
representing the Option Shares issued or to be issued hereunder
shall be stamped or otherwise imprinted with legends substantially
in the following form:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
OR THE SECURITIES LAWS OF ANY STATE, AND HAVE BEEN
ACQUIRED FOR AN INVESTMENT AND MAY NOT BE SOLD,
TRANSFERRED, PLEDGED, OR HYPOTHECATED IN THE ABSENCE OF
AN EFFECTIVE REGISTRATION STATEMENT FOR SUCH SHARES UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR AN OPINION OF
COUNSEL ACCEPTABLE TO COUNSEL FOR THE COMPANY THAT
REGISTRATION IS NOT REQUIRED UNDER SUCH LAWS.
8. Securities Law Requirements.
A. No Option granted hereunder shall be exercisable, in
whole or in part, and the Company shall not be obligated to sell
any Option Shares if such exercise and sale would, in the opinion
of counsel for the Company, violate the applicable requirements of
Federal or state securities laws. Each Option shall be subject to
the further requirement that, if at any time the Company shall
determine in its discretion that the listing or qualification of
the Option Shares under any securities exchange requirements or
under any applicable law, or the consent or approval of any
governmental regulatory body, is necessary or desirable as a
condition of, or in connection with, the issuance of the Option
Shares, such Option may not be exercised in whole or in part unless
such listing, qualification, consent or approval shall have been
effected or obtained free of any conditions not acceptable to the
Company.
B. If any law or regulation of any state or Federal
commission or agency having jurisdiction shall require the Company
or the Optionee to take any action with respect to the Option
Shares, then the date upon which the Company shall deliver or cause
to be delivered the certificate or certificates for the Option
Shares shall be postponed until full compliance shall have been
made with all such requirements.
9. Employment. Nothing contained in this Agreement shall be
deemed to grant any right of continued employment to a
participating employee or to limit or waive any rights of the
Company or any subsidiary of the Company to terminate such
employment at any time, with or without cause.
10. Amendments. The provisions of this Agreement may not be
amended, supplemented, waived or changed orally, except by a
writing signed by the party as to whom enforcement of any such
amendment, supplement, waiver or modification is sought and making
specific reference to this Agreement.
11. Assignments. This Agreement may not be assigned by the
Optionee.
12. Further Assurances. The parties hereby agree from time
to time to execute and deliver such further and other transfers,
assignments and documents and do all matters and things which may
be convenient or necessary to more effectively and completely carry
out the intentions of this Agreement.
13. Binding Effect. All of the terms and provisions of this
Agreement, whether so expressed or not, shall be binding upon,
inure to the benefit of, and be enforceable by the parties and
their respective administrators, executors, legal representatives,
heirs, successors and permitted assigns.
14. Governing Law. This Agreement and all transactions
contemplated by this Agreement shall be governed by, and construed
and enforced in accordance with, the internal laws of the State of
Florida without regard to principles of conflicts of laws.
15. Entire Agreement. This Agreement represents the entire
understanding and agreement among the parties with respect to the
subject matter hereof, and supersedes all other negotiations,
understandings and representations (if any) made by and among such
parties.
IN WITNESS WHEREOF, the undersigned have executed this
Agreement as of the date first above written.
nSTOR TECHNOLOGIES, INC.
/S/ Mark F. levy
_________________________________
By: Mark F. Levy
Its: Vice President
OPTIONEE
/S/ Lawrence F. Steffann
_______________________________
Lawrence F. Steffann
FORM OF EXERCISE
(to be executed by the registered holder hereof)
The undersigned hereby exercises the right to purchase
___________ shares of common stock, $.05 par value ("Common
Stock"), of nSTOR TECHNOLOGIES, INC. (the "Company"), evidenced by
the within Employee Incentive Stock Option Agreement and herewith
makes payment of the purchase price in full. The undersigned
represents to the Company that the undersigned is purchasing the
Common Stock for investment and not with a view to, or for sale in,
any distribution thereof.
Kindly issue certificates for shares of Common Stock in
accordance with the instruction given below.
Dated: _____________, 19__
_______________________________
Optionee
Instructions for registration of stock
____________________________________
Name (Please Print)
Social Security or other identifying
Number:_____________________________
Address:
____________________________________
City/State and Zip Code
EXHIBIT 21
nSTOR TECHNOLOGIES, INC.
Subsidiaries of the Company
and
State of Incorporation or Formation
nStor Corporation, Inc. Delaware
Imge R & D, Inc. Delaware
Imge Distribution, Inc. Delaware
Imge Maketing, inc. Delaware
nStor (Europe) Limited United Kingdom
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000075448
<NAME> NSTOR TECHNOLOGIES, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 168<F1>
<SECURITIES> 0
<RECEIVABLES> 2,964
<ALLOWANCES> (502)
<INVENTORY> 3,028
<CURRENT-ASSETS> 6,022
<PP&E> 9,797<F2>
<DEPRECIATION> (2,191)<F3>
<TOTAL-ASSETS> 14,128
<CURRENT-LIABILITIES> 3,935
<BONDS> 0
0
0<F4>
<COMMON> 1,025
<OTHER-SE> 2,125
<TOTAL-LIABILITY-AND-EQUITY> 14,128
<SALES> 18,026
<TOTAL-REVENUES> 18,097
<CGS> 15,258
<TOTAL-COSTS> 10,907
<OTHER-EXPENSES> 1,352<F5>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 987
<INCOME-PRETAX> (10,407)
<INCOME-TAX> 0
<INCOME-CONTINUING> (10,407)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,407)<F6>
<EPS-PRIMARY> (.63)
<EPS-DILUTED> (.63)
<FN>
<F1>Cash includes restricted cash of $21.
<F2>PP&E includes $6,892 of goodwill and other intangible assets.
<F3>Accumulated depreciation includes $939 of accumulated amortization on
goodwill and other intangible assets.
<F4>Preferred stock issued and outstanding includes the following: Series A
Convertible Preferred Stock - 1,667 shares; Series C Convertible Preferred
Stock - 3,000 shares, and; Series D Convertible Preferred Stock - 2,700 shares.
<F5>Other expenses include depreciation and amortization.
<F6>Net loss does not include $1,481 of dividends on preferred stock. Net loss
applicable to common stock is $11,888.
</FN>
</TABLE>
