UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported):
June 8, 1999
nStor Technologies, Inc.
------------------------
(Exact name of registrant as specified in its charter)
DELAWARE
--------
(State or other jurisdiction of incorporation)
0-8354 95-2094565
------ ----------
(Commission File No.) (I.R.S. Employer
Identification No.)
450 Technology Park
Lake Mary, Florida 32746
------------------------
(Address of principal executive offices)
(407) 829-3500
--------------
Registrant's telephone number, including area code
Not Applicable
--------------
(Former name or former address,
if changed since last report)
<PAGE>
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
On June 8, 1999 (the "Closing Date"), nStor Technologies, Inc. (the
"Registrant") purchased (the "Acquisition") 18,021,281 shares of the common
stock (the "Andataco Stock") of Andataco, Inc., a Massachusetts corporation
("Andataco"), representing approximately 76% of the total issued and outstanding
capital stock of Andataco, from the Sykes Family Trust and the Sykes Children's
Trust of 1993, for $5.1 million. The purchase price was paid in the form of two,
9.5% subordinated promissory notes of the Registrant. The principal balance of
the notes is due on June 17, 2004 and interest is payable monthly.
As part of the Acquisition, the Registrant also acquired from W. David
Sykes, the President of Andataco ("Sykes"), a promissory note (the "Shareholder
Note") in the original principal amount of $5,196,000 payable by Andataco to
Sykes. The purchase price for the Shareholder Note was: $500,000 in cash,
$150,000 of which had been paid prior to the closing; 4,654 shares of the
Registrant's newly-issued Series F Convertible Preferred Stock which is
convertible into 1,551,333 shares of the Registrant's common stock based on a
conversion price of $3.00 per share; and three-year warrants to purchase an
additional 155,133 shares of the Registrant's common stock for $3.30 per share.
The Series F Convertible Preferred Stock requires quarterly dividends at the
following annual rates: 8% during the first year, 9% during the second year and
10% thereafter.
The purchase price for the Andataco Stock and the Shareholder Note was
determined by arms length negotiations between the parties. The cash portion of
the purchase price was funded from the Registrant's available cash.
The Registrant has agreed to file a registration statement which
includes the shares of common stock issuable upon conversion of the preferred
stock and exercise of the warrants within 30 days of the Closing Date.
Sykes has entered into a three year employment agreement with nStor
Corporation, a wholly-owned subsidiary of the Registrant, which will become
effective upon the acquisition by the Registrant of the remaining 24% of the
outstanding shares of common stock of Andataco. Sykes will continue to serve as
the President of Andataco. In connection with his employment agreement, Sykes
received options to purchase 1.1 million shares of the Registrant's common stock
at an exercise price of $2.00 per share (the closing market price on April 19,
1999, the date that the terms of the options were agreed to). The options will
vest over a period of three years following the effective date of the employment
agreement. After any options have vested, they shall be exercisable for a period
of five years, regardless of Sykes' termination of employment for any reason.
Following the completion of the Acquisition, H. Irwin Levy, Chairman
and a principal shareholder of the Registrant ("Levy"), entered into a letter
agreement with Sykes pursuant to which (i) Sykes granted Levy an option, through
September 30, 1999, to purchase, for $3.00 per share, $3.2 million of the
Registrant's common stock owned by Sykes (at an agreed upon value of $3.00 per
share), less any amounts received by Sykes as a result of public sales of such
shares of common stock during the option period, and (ii) Levy agreed to
purchase from Sykes, at Sykes' option, during the period from February 1, 2000
through February 5, 2000, shares of the Registrant's common stock owned by Sykes
for a purchase price of $3.00 per share, provided, however, that Levy shall not
be obligated to purchase more than $3.2 million of the Registrant's common stock
owned by Sykes (at an agreed upon value of $3.00 per share), less any amounts
received by Sykes as a result of public sales of such shares of common stock
prior to February 1, 2000.
Andataco designs, develops, manufactures, markets and supports high
performance, high availability information storage solutions for the Open
Systems markets in the Windows NT and UNIX environments including Sun
Microsystems, Hewlett-Packard, Silicon Graphics, and NT-based computing systems.
The Registrant intends to continue to operate Andataco in its existing lines of
business under the Registrant's ownership. The Registrant intends to acquire the
remaining outstanding shares of Andataco by the earliest practicable date. In
connection with the Acquisition, the Registrant has agreed that if it acquires
the balance of Andataco's outstanding shares, the purchase price will be equal
to the greater of the per share amount paid to Sykes ($.283) or the fair market
value as determined by an independent valuation.
2
<PAGE>
ITEM 5. OTHER EVENTS
On June 8, 1999, the Registrant sold 1,500 shares of newly-issued
Series E Convertible Preferred Stock (convertible into 1,166,667 shares of the
Registrant's common stock based on a price of $3.00 per share), and three-year
warrants to purchase an aggregate of 116,667 shares of the Registrant's common
stock at a price of $3.30 per share, to three private investors in a
privately-negotiated transaction. The total purchase price for the Series E
Convertible Preferred Stock and warrants was $3.5 million in cash. Hilcoast
Development Corp., an affiliate of Levy, purchased $1,500,000 of the Series E
Convertible Preferred Stock and warrants to purchase 50,000 additional shares of
the Registrant's common stock. The Series E Convertible Preferred Stock requires
quarterly dividends at the following annual rates: 8% during the first year, 9%
during the second year and 10% thereafter.
A copy of the Press Release issued by the Registrant on June 9, 1999,
announcing the closing of the acquisition and the private placement, is attached
hereto as Exhibit 99, and is incorporated herein by reference.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL
INFORMATION AND EXHIBITS
(a) Financial Statements of Business Acquired
Report of Independent Accountants, dated January 13, 1999, and the accompanying
consolidated balance sheets of Andataco, Inc. as of October 31, 1998 and 1997,
and the related consolidated statements of operations, of cash flows and of
shareholders' equity for the years ended October 31, 1998, 1997 and 1996.
Balance sheet of Andataco, Inc. as of April 30, 1999 and the related statements
of operations and of cash flows for the six months ended April 30, 1999 and 1998
(unaudited).
(b) Pro Forma Financial Information
nStor Technologies, Inc. and Subsidiaries Unaudited Proforma Condensed Combined
Financial Statements.
(c) Exhibits
Exhibit No.: Description of Documents
- ------------ ------------------------
2.1 Purchase Agreement, dated as of March 2, 1999, by and among
the Registrant, W. David Sykes and the Sykes Children's Trust
of 1993 dated November 22, 1993
2.2 Amendment No. 1 to Purchase Agreement, dated as of April 26,
1999, by and among the Registrant, W. David Sykes, the Sykes
Family Trust and the Sykes Children's Trust of 1993 dated
November 22, 1993
2.3 Amendment No. 2 to Purchase Agreement, dated as of June 8,
1999, by and among the Registrant, W. David Sykes, the Sykes
Family Trust and the Sykes Children's Trust of 1993 dated
November 22, 1993
4.1 Certificate of Designation of Series E Convertible Preferred
Stock of the Registrant
4.2 Certificate of Designation of Series F Convertible Preferred
Stock of the Registrant
4.3 Warrant, dated June 8, 1999, issued to W. David Sykes
3
<PAGE>
4.4 Form of Warrant, dated June 8, 1999, issued to purchasers of
Series E Convertible Preferred Stock
4.5 9.5% Subordinated Note, dated June 8, 1999, issued to the
Sykes Children's Trust of 1993
4.6 9.5% Subordinated Note, dated June 8, 1999, issued to the
Sykes Family Trust
4.7 Registration Rights Agreement, dated June 8, 1999, by and
between nStor Technologies, Inc. and W. David Sykes
4.8 Form of Registration Rights Agreement, dated June 8, 1999,
issued to the purchasers of Series E Convertible Preferred
Stock
4.9 Form of Employment Agreement between the Registrant and
W. David Sykes
4.10 Letter Agreement, dated June 8, 1999, by and between H. Irwin
Levy and W. David Sykes
99.1 Press Release issued by the Registrant on June 9, 1999
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, Registrant has duly caused this report to be signed on its behalf
by the undersigned hereunto duly authorized.
nSTOR TECHNOLOGIES, INC.
/s/ Larry Calise
-------------------------
Larry Calise, Principal
Financial Officer
Date: June 22, 1999
4
<PAGE>
ANDATACO, INC.
FINANCIAL STATEMENTS
As of October 31, 1998 and 1997 and for the Years Ended
October 31, 1998, 1997, and 1996 and
Report of Independent Accountants
5
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Shareholders of Andataco, Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of cash flows and of
shareholders' equity (deficit) present fairly, in all material respects, the
financial position of Andataco, Inc. and its subsidiaries at October 31, 1998
and 1997, and the results of their operations and their cash flows for each of
the three years in the period ended October 31, 1998, in conformity with
generally accepted accounting principles. 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 of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
San Diego, California
January 13, 1999
6
<PAGE>
ANDATACO, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
October 31,
---------------------------
1998 1997
------------ ------------
<S> <C> <C>
A S S E T S
Current assets:
Cash ............................................................. $ 23,000 $ 41,000
Accounts receivable, net ......................................... 10,628,000 10,846,000
Inventories ...................................................... 4,923,000 7,458,000
Other current assets ............................................. 634,000 353,000
------------ ------------
Total current assets ........................................... 16,208,000 18,698,000
Goodwill, net ....................................................... 5,993,000 7,665,000
Property and equipment, net ......................................... 3,415,000 3,599,000
Other assets ........................................................ 66,000 27,000
------------ ------------
$ 25,682,000 $ 29,989,000
============ ============
L I A B I L I T I E S A N D S H A R E H O L D E R S' E Q U I T Y
Current liabilities:
Accounts payable ................................................. $ 7,853,000 $ 7,660,000
Accrued expenses ................................................. 2,610,000 4,202,000
Deferred revenue ................................................. 2,259,000 1,554,000
Current portion of notes payable ................................. -- 113,000
------------ ------------
Total current liabilities ...................................... 12,722,000 13,529,000
------------ ------------
Bank line of credit ................................................. 5,462,000 6,500,000
Notes payable, less current portion ................................. -- 28,000
Shareholder loan .................................................... 5,196,000 5,196,000
------------ ------------
Total long-term liabilities .................................... 10,658,000 11,724,000
------------ ------------
Commitments and contingencies (Note 9)
Shareholders' equity:
Common stock, $0.01 par value; 40,000,000 shares
authorized; 23,819,399 shares issued and outstanding ........... 238,000 238,000
Additional paid in capital ....................................... 10,107,000 10,107,000
Accumulated deficit .............................................. (8,043,000) (5,609,000)
------------ ------------
Total shareholders' equity ..................................... 2,302,000 4,736,000
------------ ------------
$ 25,682,000 $ 29,989,000
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE>
ANDATACO, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended October 31,
-------------------------------------------
1998 1997 1996
---------- ------------ ---------------
<S> <C> <C> <C>
Sales ............................................... $ 77,519,000 $ 93,259,000 $ 99,733,000
Cost of sales ....................................... 54,293,000 71,682,000 80,375,000
------------- ------------- -------------
Gross profit ..................................... 23,226,000 21,577,000 19,358,000
Operating expenses:
Selling, general and administrative .............. 22,755,000 22,620,000 17,298,000
Rent expense to shareholder ...................... 332,000 330,000 330,000
Purchased research and development ............... -- 2,400,000 --
Research and development ......................... 1,552,000 1,325,000 919,000
------------- ------------- -------------
24,639,000 26,675,000 18,547,000
------------- ------------- -------------
(Loss) income from operations ....................... (1,413,000) (5,098,000) 811,000
Other income (expense):
Interest income .................................. -- -- 1,000
Interest expense ................................. (553,000) (650,000) (472,000)
Interest expense to shareholder .................. (468,000) (461,000) (301,000)
------------- ------------- -------------
(1,021,000) (1,111,000) (772,000)
------------- ------------- -------------
(Loss) income before provision for taxes ............ (2,434,000) (6,209,000) 39,000
Provision for income taxes .......................... -- -- --
------------- ------------- -------------
Net (loss) income ................................... $ (2,434,000) $ (6,209,000) $ 39,000
============= ============= =============
Net (loss) income per share (basic and diluted) ..... $ (0.10) $ (0.30) $ 0.00
============= ============= =============
Shares used in computing net (loss) income per share:
Basic .......................................... 23,819,000 20,464,000 18,078,000
============= ============= =============
Diluted ........................................ 23,819,000 20,464,000 18,168,000
============= ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
8
<PAGE>
ANDATACO, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended October 31,
------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income .................................................... $(2,434,000) $ (6,209,000) $ 39,000
Adjustments to reconcile net (loss) income to net cash provided
by (used in) operating activities:
Depreciation and amortization .................................... 1,715,000 1,335,000 446,000
Amortization of goodwill ......................................... 1,672,000 697,000 --
Purchased research and development ............................... -- 2,400,000 --
Stock compensation ............................................... -- 137,000 --
Changes in assets and liabilities, net of Merger transaction (Note 2):
Accounts receivable .............................................. 218,000 3,149,000 492,000
Inventories ...................................................... 2,535,000 192,000 3,176,000
Other assets ..................................................... (320,000) 73,000 (70,000)
Accounts payable ................................................. 193,000 (3,525,000) (4,866,000)
Accrued expenses ................................................. (1,592,000) 328,000 (569,000)
Deferred revenue ................................................. 705,000 1,154,000 74,000
----------- ------------- ------------
Net cash provided by (used in) operating activities ............ 2,692,000 (269,000) (1,278,000)
----------- ------------- ------------
Cash flows from investing activities:
Cash acquired in Merger transaction (net of cash expended of
$478,000) (Note 2) ................................................. -- 676,000 --
Payments for purchases of property and equipment ..................... (1,531,000) (682,000) (770,000)
----------- ------------- ------------
Net cash used in investing activities .......................... (1,531,000) (6,000) (770,000)
----------- ------------- ------------
Cash flows from financing activities:
(Payments) proceeds under bank line of credit agreement, net ......... (1,038,000) (553,000) 4,508,000
Dividends paid ....................................................... -- -- (2,955,000)
Proceeds from shareholder loan ....................................... -- 269,000 2,000,000
Payments on shareholder loan ......................................... -- -- (758,000)
Payments on notes payable ............................................ (141,000) (165,000) (287,000)
----------- ------------- ------------
Net cash (used in) provided by financing activities ............ (1,179,000) (449,000) 2,508,000
----------- ------------- ------------
Net (decrease) increase in cash ......................................... (18,000) (724,000) 460,000
Cash at beginning of year ............................................... 41,000 765,000 305,000
----------- ------------- ------------
Cash at end of year ..................................................... $ 23,000 $ 41,000 $ 765,000
=========== ============= ============
Supplemental disclosures of cash flow information:
Cash paid for interest ............................................... $ 976,000 $ 1,127,000 $ 812,000
=========== ============= ============
Cash paid for income taxes ........................................... $ -- $ -- $ 27,000
=========== ============= ============
Supplemental disclosure of non-cash activities:
Issuance of stock in Merger transaction (Note 2) ..................... $ -- $ 11,606,000 $ --
=========== ============= ============
</TABLE>
See accompanying notes to consolidated financial statements.
9
<PAGE>
ANDATACO, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Additional Accumulated
Common Stock Paid in Earnings
Shares Amount Capital (Deficit) Total
------ ------ ------- --------- -----
<S> <C> <C> <C> <C> <C>
Balance at October 31, 1995 ............ 10,000 $ 2,000 $ 2,116,000 $ 2,118,000
Dividends paid ......................... (2,955,000) (2,955,000)
Net income ............................. 39,000 39,000
------------ ------------- ------------- ------------ -------------
Balance at October 31, 1996 ............ 10,000 2,000 (800,000) (798,000)
Recapitalization of ANDATACO of
California as a result of Merger with
IPL Systems, Inc. (Note 2) .......... (10,000) (2,000) $ 2,000 --
Elimination of S Corporation deficit
against additional paid in capital at
date of Merger (Note 2) ............. (1,400,000) 1,400,000 --
IPL common stock outstanding
immediately before Merger (note 2) .. 5,633,819 56,000 (56,000) --
Issuance of IPL common stock in
Merger (Note 2) ..................... 18,078,381 181,000 11,425,000 11,606,000
Issuance of common stock for
compensation ........................ 107,199 1,000 136,000 137,000
Net loss ............................... (6,209,000) (6,209,000)
------------ ------------- ------------- ------------ -------------
Balance at October 31, 1997 ............ 23,819,399 238,000 10,107,000 (5,609,000) 4,736,000
Net loss ............................... (2,434,000) (2,434,000)
------------ ------------- ------------- ------------ -------------
Balance at October 31, 1998 ............ 23,819,399 $ 238,000 $ 10,107,000 $ (8,043,000) $ 2,302,000
============ ============= ============= ============ =============
</TABLE>
See accompanying notes to consolidated financial statements.
10
<PAGE>
ANDATACO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - The Company
ANDATACO, Inc. (the "Company" or "ANDA"), founded in 1986, designs,
develops, manufactures, markets and supports high performance, high availability
information storage solutions for the open systems markets in the Windows NT and
UNIX environments. The Company's fully integrated hierarchy of data storage
solutions includes fault tolerant RAID (Redundant Array of Independent Disks)
and RAID-ready disk storage, tape backup and restore products, and data storage
management software. The Company supplies its products through direct, indirect
and original equipment manufacturer sales and service channels throughout the
world. The Company's president and principal shareholder and his affiliates
beneficially own 75.9% of the Company's outstanding common stock.
NOTE 2 - Business Combination
On June 3, 1997 (the "Closing Date"), ANDA (formerly IPL Systems, Inc.)
completed a business combination with ANDATACO of California, whereby ANDATACO
of California was merged with a wholly-owned subsidiary of ANDA (the "Merger").
Under the terms of the merger agreement, the shareholders of ANDATACO of
California were issued a total of 18,078,381 shares of ANDA Class A Common Stock
in exchange for all outstanding shares of capital stock of ANDATACO of
California. Although as a legal matter the Merger resulted in ANDATACO of
California becoming a wholly-owned subsidiary of ANDA, for financial reporting
purposes the Merger was treated as a recapitalization of ANDATACO of California
and an acquisition of ANDA by ANDATACO of California (reverse acquisition). The
financial reporting requirements of the Securities and Exchange Commission
require that the financial statements reported by ANDA subsequent to the Merger
be those of ANDATACO of California, which include the results of operations of
ANDA from the Closing Date.
The acquisition of ANDA by ANDATACO of California was accounted for using
the purchase method. Accordingly, the purchase price was allocated to the
estimated fair market value of identifiable tangible and intangible assets
acquired and liabilities assumed. Based upon an independent valuation, the
Company allocated $2,400,000 to acquired in-process research and development for
which there is no future alternative use and $400,000 to existing proprietary
technology for which technological feasibility had been established. As required
by generally accepted accounting principles, the amount allocated to in-process
research and development was recorded as a one-time charge to operations and the
amount allocated to existing technology was amortized over its estimated useful
life. The excess of the purchase price over the identifiable net assets acquired
of $8,362,000 was recorded as goodwill and is being amortized on a straight-line
basis over its estimated useful life of five years.
The following table sets forth the allocation of the purchase price to the
estimated fair value of identifiable tangible and intangible assets acquired and
liabilities assumed:
Purchase Price:
Fair value of ANDA stock of 5,633,819 shares outstanding
immediately before the Merger ........................ $ 11,606,000
Transaction costs ...................................... 478,000
------------
12,084,000
------------
Allocation of Purchase Price to Identifiable Net Assets:
Tangible assets ........................................ 4,203,000
Assumed liabilities .................................... (3,281,000)
In-process research and development .................... 2,400,000
Intangible asset ....................................... 400,000
------------
3,722,000
------------
Excess of Purchase Price Over Identifiable
Net Assets ............................................. $ 8,362,000
============
11
<PAGE>
ANDATACO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is unaudited pro forma results of operations as if the
transaction had been consummated at the beginning of fiscal year ended October
31, 1997:
Year Ended
October 31,
1997
----
(unaudited)
Sales............................................ $ 97,507,000
==============
Net loss......................................... $ (12,500,000)
==============
Net loss per share (basic and diluted)........... $ (0.53)
==============
NOTE 3 - Summary of significant Accounting Policies
Principles of Consolidation
The financial statements as of and for the year ended October 31, 1998
consolidate the accounts of the Company and its wholly-owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Management Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Management believes that its projected income and its bank line of credit
will be sufficient to meet the Company's capital and operating requirements for
the next 12 months. If sales are less than projected, or if the Company is
unable to generate adequate cash flow from its sales, the Company may need to
seek additional sources of capital and/or decrease its planned capital and
operating expenditures.
Revenue Recognition
Revenue from the sale of products is recognized as of the date shipments
are made to customers net of an allowance for returns. A provision is made for
warranty costs in excess of those provided for by the original equipment
manufacturer. Revenue related to extended warranty contracts is deferred and
recognized over the period in which costs are expected to be incurred, based
upon historical evidence, in performing services under the contract. The Company
also contracts with outside vendors to provide service relating to various
on-site warranties which are offered for sale to customers; on-site warranty
revenues and amounts paid in advance to outside service organizations are
recognized in the financial statements in sales and cost of goods sold,
respectively, over the warranty period.
Inventories
Inventories are stated at the lower of cost (first-in-first-out method) or
market.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the depreciable
assets (generally five to seven years). Leasehold improvements are amortized on
a straight-line basis over the shorter of the useful life of the asset or the
lease term. Upon the sale or retirement of property or equipment, the asset cost
and related accumulated depreciation are removed from the respective accounts
and any gain or loss is included in the results of operations. Total
depreciation and amortization was $1,715,000, $935,000 and $446,000 in fiscal
1998, 1997 and 1996, respectively.
12
<PAGE>
ANDATACO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Long-Lived Assets
The Company assesses potential impairments to its long-lived assets,
certain identifiable intangibles and associated goodwill when there is evidence
that events or changes in circumstances have made recovery of an asset's
carrying value unlikely. An impairment loss would be recognized when the sum of
the expected future net undiscounted cash flows is less than the carrying amount
of the asset. No such impairment losses have been recorded by the Company.
Goodwill
The Company has classified as goodwill the purchase price in excess of fair
value of the identifiable net assets acquired in the Merger. Goodwill is being
amortized on a straight-line basis over its estimated useful life of five years.
Amortization charged to operations amounted to $1,672,000 and $697,000 for the
years ended October 31, 1998 and 1997, respectively.
Research and Development Costs
Research and development costs are expensed as incurred.
Stock-Based Compensation
The Company measures compensation expense for its stock-based employee
compensation plans using the intrinsic value method and provides pro forma
disclosures of net income and earnings per share as if fair value based methods
had been applied in measuring compensation expense (Note 8). Compensation
charges related to non-employee stock-based compensation are measured using fair
value based methods.
Income Taxes
The Company records a provision (benefit) for income taxes using the
liability method. Current income tax expense or benefit represents the amount of
income taxes expected to be payable or refundable for the current year. A
deferred income tax liability or asset is established for the expected future
consequences resulting from the differences between the financial reporting and
income tax bases of assets and liabilities and from net operating loss and
credit carryforwards. Deferred income tax expense or benefit represents the net
change during the year in the deferred income tax liability or asset. A
valuation allowance is established when necessary to reduce deferred tax assets
to the amounts expected to be more likely than not realized.
Concurrent with the Merger, ANDATACO of California changed its taxpayer
status from a Subchapter S Corporation to a Subchapter C Corporation. Effective
with that change, the Company transferred the amount of its accumulated deficit
at that date to additional paid in capital. Therefore, the Company's accumulated
deficit at October 31, 1998 includes losses solely incurred by the Company since
the Merger.
Prior to the consummation of the Merger, ANDATACO of California elected to
be taxed under Subchapter S of the Internal Revenue Code of 1986, as amended,
and consequently all federal income taxes and most state taxes were paid
directly by its shareholders. Because of the change in taxpayer status to a
Subchapter C Corporation, the Company is subject to federal and state income
taxes. The tax provision in fiscal 1997 is calculated giving effect to the
change of ANDATACO of California from a Subchapter S Corporation to a Subchapter
C Corporation, and resultant adjustments for federal and state income taxes, as
if ANDATACO of California had been taxed as a C Corporation rather than an S
Corporation since inception.
Pro Forma Net Income (Loss) per Share
(Unaudited)
Pro forma net income (loss) per share amounts of $(0.10), $(0.31) and $0.00
in fiscal 1998, 1997 and 1996, respectively, reflect the Company's conversion
from a Subchapter S Corporation to a Subchapter C Corporation and the resultant
adjustments for federal and state income taxes as if the Company had been taxed
as a Subchapter C Corporation rather than a Subchapter S Corporation since
inception. Pro forma net income (loss) per share is computed based on the
weighted average number of shares of common stock outstanding during the
respective periods.
13
<PAGE>
ANDATACO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair Value of Financial Instruments
It is management's belief that the carrying amounts shown for the Company's
financial instruments are reasonable estimates of their related fair values
based on their terms or short-term nature. The carrying amount shown for the
bank line of credit approximates its fair value due to the relatively short-term
nature of this arrangement and to its adjustable interest rate. The carrying
amounts shown for notes payable and shareholder loan are reasonable
approximations of their fair values based upon the interest rates at which the
Company could enter into similar borrowing arrangements.
Net Income (Loss) Per Share
The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" as required in the first quarter of fiscal 1998. Basic
earnings per share is computed based on the weighted average number of shares of
common stock outstanding during the period. Diluted earnings per share is
computed based on the weighted average number of shares of common stock
outstanding during the period increased by the weighted average number of common
stock equivalents outstanding during the period, using the treasury stock
method. Shares issuable upon exercise of outstanding stock options and warrants,
totaling 2,991,000 and 2,402,000 as of October 31, 1998 and 1997, respectively,
have been excluded from the computation of diluted earnings per share as their
effect would be anti-dilutive.
Concentration of Credit Risk
The Company's customers include original equipment manufacturers,
integrators, distributors and end-users. Financial instruments which potentially
subject the Company to concentrations of credit risk are primarily accounts
receivable. The Company performs ongoing credit evaluations of its customers,
generally requires no collateral and maintains allowances for potential credit
losses and sales returns. Credit losses have been within management's
expectations.
Dependence on Suppliers
The Company has and will continue to rely on outside vendors to manufacture
certain subsystems and electronic components and subassemblies used in the
production of the Company's products. Certain components, subassemblies,
materials and equipment necessary for the manufacture of the Company's products
are obtained from a sole supplier or a limited group of suppliers. The Company
performs ongoing quality and supply evaluation reviews with its outside vendors.
Supply, delivery and quality of subsystems and electronic components and
subassemblies have been adequate to fulfill customer orders and management does
not expect any vendor problems in the next 12 months.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130 ("FAS 130"), "Reporting
Comprehensive Income," which the Company will be required to adopt in the first
quarter of fiscal 1999. This statement will require the Company to report in the
financial statements, in addition to net income, comprehensive income and its
components including, as applicable, foreign currency items, minimum pension
liability adjustments and unrealized gains and losses on certain investments in
debt and equity securities. Upon adoption, the Company will also be required to
reclassify financial statements for earlier periods provided for comparative
purposes. The Company expects that adoption will have no material impact on the
Company's statement of operations.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131 ("FAS 131"), "Disclosures about Segments of an Enterprise and Related
Information," which the Company will be required to adopt for fiscal 1999. This
statement establishes standards for reporting information about operating
segments in annual financial statements and requires selected information about
operating segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. Under FAS 131, operating segments are to
be determined consistent with the way that management organizes and evaluates
financial information internally for making operating decisions and assessing
performance. The Company expects that adoption will have no material impact on
the Company's financial statements.
14
<PAGE>
ANDATACO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133 ("FAS 133"), "Accounting for Derivative Instruments and Hedging
Activities," which the Company will be required to adopt for fiscal 2000. This
statement establishes a new model for accounting for derivatives and hedging
activities. Under FAS 133, all derivatives must be recognized as assets and
liabilities and measured at fair value. The Company expects that adoption will
have no material impact on the Company's financial statements.
NOTE 4 - Composition of Certain Financial Statement Captions
<TABLE>
<CAPTION>
October 31,
------------------------------
1998 1997
------------- -------------
<S> <C> <C>
Accounts receivable:
Accounts receivable - trade .................... $ 10,960,000 $ 11,106,000
Less allowance for doubtful accounts and
returns........................................ (332,000) (260,000)
------------- -------------
$ 10,628,000 $ 10,846,000
============= =============
Inventories:
Purchased components ........................... $ 3,900,000 $ 5,541,000
Work in progress ............................... 280,000 125,000
Finished goods ................................. 743,000 1,792,000
------------- -------------
$ 4,923,000 $ 7,458,000
============= =============
Property and equipment:
Equipment ...................................... $ 5,666,000 $ 4,334,000
Leasehold improvements ......................... 1,098,000 942,000
Furniture and fixtures ......................... 809,000 797,000
Vehicles ....................................... 150,000 119,000
------------- -------------
7,723,000 6,192,000
Less accumulated depreciation and amortization . (4,308,000) (2,593,000)
------------- -------------
$ 3,415,000 $ 3,599,000
============= =============
Accrued expenses:
Sales commissions .............................. $ 885,000 $ 1,807,000
Other .......................................... 1,725,000 2,395,000
------------- -------------
$ 2,610,000 $ 4,202,000
============= =============
</TABLE>
Bonuses Payable
The Company has recorded a long-term obligation related to ten-year bonus
agreements (the "Agreements") with certain employees. Under the Agreements, a
bonus will be payable to an employee ten years after the date employment
commenced with the Company. Continuous employment during the ten years is a
condition precedent to the Company's obligation to pay the bonus. The bonus is
accrued over the ten year service period; amounts forfeited are credited to
operations. In fiscal 1998, the last participating member of the Agreement
achieved the ten year anniversary and was paid in full. At October 31, 1998 and
1997, the Company has accrued $0 and $172,000 as a short-term liability,
respectively. A net charge of $6,000 and $5,000 and a net credit of $108,000 are
included in the results of operations for the years ended October 31, 1998, 1997
and 1996, respectively.
The Company has a management incentive award plan which provides for the
payment of cash awards or bonuses to officers and other key employees when the
Company achieves specified objectives. Awards earned under the plan were $0,
$17,000, and $0 during the years ended October 31, 1998, 1997 and 1996,
respectively.
15
<PAGE>
ANDATACO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - Bank Line of Credit
The Company has a revolving line of credit with a bank which provides for
it to borrow the lesser of (i) $10,000,000 or (ii) 80 percent of eligible
domestic accounts receivable plus the lesser of $1,750,000 or 25 percent of
eligible inventory, at the bank's prime rate plus one-half percent (8.5 percent
at October 31, 1998). The revolving line of credit was renewed in April 1998 for
a thirty-six month period. The line is secured by all of the Company's property
and accounts receivable and is guaranteed by the Company's principal
shareholder. As of October 31, 1998 and 1997, there was $5,462,000 and
$6,500,000 outstanding and $3,799,000 and $3,311,000 available under the line of
credit, respectively. The credit agreement includes covenants which, among other
things, require the Company to maintain stated minimum working capital and net
worth amounts plus specific liquidity and long-term solvency ratios.
NOTE 6 - Notes Payable
<TABLE>
<CAPTION>
October 31,
--------------------------------
1998 1997
--------------- -------------
<S> <C> <C>
Notes payable are comprised as follows:
Note payable to a bank, payable in monthly installments of $9,375 principal
plus interest at the bank's prime rate plus 1 percent (9.5 percent at
October 31, 1997) through April 1998
(secured by certain assets)................................................ $ - $ 141,000
------------ -------------
- 141,000
Less current portion......................................................... - (113,000)
------------ -------------
$ - $ 28,000
============ =============
</TABLE>
NOTE 7 - Income Taxes
No provision for income taxes has been recorded in fiscal 1998 and 1997
because of losses incurred in these years.
<TABLE>
<CAPTION>
Deferred income taxes at October 31, 1998 and 1997 are comprised as
follows:
October 31,
----------------------------------
1998 1997
--------------- ---------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards........................................... $ 5,120,000 $ 3,991,000
Inventory.................................................................. 666,000 1,299,000
Allowance for doubtful accounts and returns................................ 130,000 194,000
Warranty reserves.......................................................... 59,000 102,000
Vacation and deferred compensation......................................... 86,000 268,000
State income taxes......................................................... 5,000 4,000
Property and equipment depreciation........................................ 150,000 -
Other...................................................................... 39,000 259,000
---------------- ---------------
Gross deferred tax asset................................................. 6,255,000 6,117,000
---------------- ---------------
Deferred tax liabilities:
Property and equipment depreciation........................................ - (33,000)
---------------- ---------------
Gross deferred tax liability........................................... - (33,000)
---------------- ---------------
Valuation allowance............................................................. (6,255,000) (6,084,000)
---------------- ---------------
Net deferred income taxes....................................................... $ - $ -
================ ===============
</TABLE>
16
<PAGE>
ANDATACO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has recorded a valuation allowance in full for deferred tax
assets which, more likely than not, will not be realized based on recent
operating results.
The Company has approximately $14,159,000 in federal and $5,793,000 in
state net operating loss carryforwards which expire through 2018 and 2003,
respectively. The Company experienced a change of control as a result of the
Merger, which limits the ability of the Company to utilize the carryforward
amounts. Any future change of control, as defined in Section 382 of the Internal
Revenue Code, could further limit the Company's ability to utilize the
carryforwards.
A reconciliation of the provision for income taxes to the amount computed
by applying the statutory federal income tax rate to income before income taxes
follows:
<TABLE>
<CAPTION>
Year Ended October 31,
------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Amount computed at statutory Federal rate of 34%.............. $ (828,000) $ (2,111,000) $ 13,000
Benefit of "S" Corporation status............................. - 209,000 (13,000)
Increase in valuation allowance............................... 171,000 783,000 -
Expenses not deductible for tax purposes...................... 602,000 1,257,000 -
Conversion from "S" to "C" Corporation........................ - (138,000) -
Other......................................................... 55,000 - -
------------ ------------ ----------
$ - $ - $ -
============ ============ ==========
</TABLE>
NOTE 8 - Stock Options and Employee Benefit Plans
The Company has a number of stock option plans, administered by its Board
of Directors or its designees, which provide for the issuance of options to
employees, officers and directors. The exercise price of a stock option is
generally equal to the fair market value of the Company's common stock on the
date the option is granted. Certain of the plans permit options granted to
qualify as "Incentive Stock Options" under the Internal Revenue Code while other
plans are specified as non-qualified. Additionally, certain of the non-qualified
plans call for 100% vesting of outstanding options upon a change of control of
the Company. Options generally vest at a rate of 20 percent per year over a
period of five years from the date of grant and expire after a period not to
exceed ten years. However, the Board may, at its discretion, implement a
different vesting schedule with respect to any new stock option grant. A total
of 4,725,500 shares of Class A Common Stock has been reserved for issuance under
the Company's stock option plans.
17
<PAGE>
ANDATACO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Transactions under the Company's stock option plans during the years ended
October 31, 1998, 1997 and 1996 are summarized as follows:
<TABLE>
<CAPTION>
1993, 1996 Consolidated and 1997 Plans Director Plan
-------------------------------------- ------------------------------------
Weighted Weighted Weighted Weighted
Number Average Average Number Average Average
of Options Exercise Price Fair Value of Options Exercise Price Fair Value
---------- -------------- ---------- ---------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, October 31, 1995.. 522,300 $ 3.04 32,000 $ 6.12
Granted .................... 243,500 2.40 $ 1.08 12,000 14.54 $ 3.27
Exercised .................. (46,300) 2.66 --
Canceled ................... (143,900) 3.48 (7,200) 8.92
---------- ---------
Outstanding, October 31, 1996.. 575,600 2.69 36,800 8.32
Granted .................... 1,989,500 1.56 1.07 --
Exercised .................. -- --
Canceled ................... (380,600) 2.79 --
---------- ---------
Outstanding, October 31, 1997.. 2,184,500 1.64 36,800 8.32
Granted .................... 2,031,000 1.33 1.08 --
Exercised .................. -- --
Canceled ................... (1,437,272) 1.53 (4,800) 8.92
---------- ---------
Outstanding, October 31, 1998.. 2,778,228 0.97 32,000 8.23
========== =========
Exercisable, October 31, 1998.. 512,985 1.13 19,600 10.28
========== =========
</TABLE>
The following table sets forth information regarding options outstanding at
October 31, 1998 under the 1993, 1996 Consolidated and 1997 Plans:
<TABLE>
<CAPTION>
Weighted
Average
Weighted Weighted Exercise
Range of Number Average Average Price for
Exercise Currently Exercise Remaining Currently
Number of Options Prices Exercisable Price Life (Years) Exercisable
- ----------------- ------ ----------- ----- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
200,000 $ 0.69 - $ 0.69 9.92 $ -
1,654,852 0.75 186,845 0.75 9.31 0.75
530,000 0.81 - 1.13 250,000 1.09 8.71 1.13
278,000 1.56 - 1.88 - 1.75 9.02 -
115,376 2.00 - 2.44 76,140 2.11 7.94 2.11
--------- --------
2,778,228 512,985
========= ========
</TABLE>
The following table sets forth information regarding options outstanding at
October 31, 1998 under the Director Plan:
<TABLE>
<CAPTION>
Weighted
Average
Weighted Weighted Exercise
Range of Number Average Average Price for
Exercise Currently Exercise Remaining Currently
Number of Options Prices Exercisable Price Life (Years) Exercisable
- ----------------- ------ ----------- ----- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
10,000 $ 3.25 4,000 $ 3.25 7.06 $ 3.25
10,000 5.63 6,000 5.63 6.61 5.63
6,000 8.25 - 9.25 3,600 8.58 6.63 8.81
6,000 20.50 6,000 20.50 2.81 20.50
------ -------
32,000 19,600
====== =======
</TABLE>
18
<PAGE>
ANDATACO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
No compensation expense has been recognized for the Company's employee
option grants, which are fixed in nature, as the options have been granted at
fair market value. Pro forma information regarding net income and net earnings
per common share is determined as if the Company had accounted for its
stock-based awards to employees under fair value methods. The fair value of
options granted in fiscal 1998, 1997 and 1996 has been estimated at the date of
grant using the Black-Scholes option pricing model using the following
assumptions:
<TABLE>
<CAPTION>
Year Ended October 31,
----------------------------------------
1998 1997 1996
----------- --------- --------
<S> <C> <C> <C>
Risk-free interest rate................................... 5.50% 6.13% 6.16%
Volatility................................................ 168.0% 80.0% 80.0%
Dividend yield............................................ 0.0% 0.0% 0.0%
Expected life (years)..................................... 6.0 5.0 5.0
</TABLE>
For purposes of pro forma disclosures, the estimated fair value of the
options is assumed to be amortized to expense over the options' vesting period.
The Company's pro forma information for the years ended October 31 is as
follows:
<TABLE>
<CAPTION>
Year Ended October 31,
--------------------------------------------
1998 1997 1996
------------ ------------ --------------
<S> <C> <C> <C>
Net (loss) income:
As reported................................................. $ (2,434,000) $ (6,209,000) $ 39,000
============ ============ ==========
Pro forma.................................................... $ (3,120,000) $ (6,385,000) $ (69,000)
============ ============ ==========
Net (loss) income per share:
As reported................................................. $ (0.10) $ (0.30) $ 0.00
============ ============ ==========
Pro forma.................................................... $ (0.13) $ (0.31) $ 0.00
============ ============ ==========
</TABLE>
401(k) Plan
During 1992, the Company adopted an employee savings and retirement plan
(the "401(k) Plan") covering all of the Company's employees. The 401(k) Plan
permits, but does not require, matching contributions by the Company on behalf
of all participants. No such contributions were made in fiscal 1998, 1997 or
1996.
Stock Warrant
There are warrants outstanding with a right to purchase 180,783 shares of
the Company's common stock with an exercise price of $1.94 per share. The
warrants expire in March 1999.
NOTE 9 - Commitments and Contingencies
The Company currently conducts its operations in twenty facilities
throughout the United States. Certain of these facilities are leased from
various parties, including related parties, under noncancelable operating leases
that expire at various times through October 2003.
19
<PAGE>
ANDATACO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Future minimum rental commitments under non-cancelable operating leases,
inclusive of the Company's obligation to its president and principal shareholder
(Note 10), are reflected in the following table:
Year ending
October 31,
-----------
1999.................................................. $ 786,000
2000.................................................. 727,000
2001.................................................. 604,000
2002.................................................. 494,000
2003.................................................. 187,000
--------------
$ 2,798,000
==============
Total rent expense was $1,107,000, $918,000 and $853,000 for the years
ended October 31, 1998, 1997 and 1996, respectively.
The Company may be subject to various claims and legal proceedings in the
ordinary course of conducting its business. In the opinion of management, the
liability associated with the resolution of such matters, if any, will not have
a material adverse effect on the Company's financial position, results of
operations or cash flows.
NOTE 10 - Certain Related Party Transactions
The Company currently leases its corporate headquarters from an entity
owned by the president and principal shareholder of the Company. The Company
paid this entity approximately $330,000 during each of the years ended October
31, 1998, 1997 and 1996 under the terms of the lease agreement.
The shareholder loan from the Company's president and principal shareholder
to the Company is unsecured, due in June 2004, with interest payable monthly at
9 percent per annum. This loan is subordinate to the bank line of credit.
Interest expense from the shareholder loan was $468,000, $461,000 and $301,000
during the years ended October 31, 1998, 1997 and 1996, respectively.
20
<PAGE>
ANDATACO, INC.
FINANCIAL STATEMENTS
As of April 30, 1999 and for the Six Months Ended April 30, 1999 and 1998
21
<PAGE>
<TABLE>
<CAPTION>
ANDATACO, INC.
Consolidated Balance Sheet
April 30, 1999
(Unaudited)
<S> <C>
ASSETS
Current assets:
Cash $ 23,000
Accounts receivable, net 6,257,000
Inventories 6,451,000
Other current assets 1,056,000
-------------
Total current assets 13,787,000
Goodwill, net 5,156,000
Property and equipment, net 2,947,000
Other assets 96,000
-------------
$21,986,000
=============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $6,515,000
Accrued expenses 2,420,000
Deferred revenue 2,102,000
-------------
Total current liabilities 11,037,000
-------------
Long-term liabilities:
Bank line of credit 5,000,000
Shareholder loan 5,196,000
-------------
Total long-term liabilities 10,196,000
-------------
Shareholders' equity:
Common Stock 238,000
Additional paid-in capital 10,149,000
Accumulated deficit (9,634,000)
-------------
Total shareholders' equity 753,000
-------------
$21,986,000
=============
</TABLE>
See notes to unaudited consolidated financial statements.
22
<PAGE>
ANDATACO, INC.
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
April 30
------------------------------------
1999 1998
----------------- -----------------
<S> <C> <C>
Sales $31,370,000 $42,756,000
Cost of sales 22,375,000 29,300,000
---------------- ----------------
Gross profit 8,995,000 13,456,000
---------------- ----------------
Operating expenses:
Selling, general and administrative 9,432,000 12,463,000
Rent expense to shareholder 166,000 166,000
Research and development 506,000 914,000
---------------- ----------------
Total operating expenses 10,104,000 13,543,000
---------------- ----------------
Loss from operations (1,109,000) (87,000)
Interest expense 248,000 288,000
Interest expense to shareholder 234,000 234,000
---------------- ----------------
Net loss $(1,591,000) $(609,000)
================ ================
Net loss per share (basic and diluted) $ (0.07) $ (0.03)
================ ================
Shares used in computing net loss
per share (basic and diluted) 23,819,399 23,819,399
================ ================
</TABLE>
See notes to unaudited consolidated financial statements.
23
<PAGE>
ANDATACO, INC.
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
April 30,
---------------------------------
1999 1998
-------------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,591,000) $ (609,000)
Adjustments to reconcile net loss
to cash provided by operating activities:
Depreciation 879,000 769,000
Amortization of goodwill 837,000 836,000
Stock compensation 42,000 -
Changes in assets and liabilities:
Accounts receivable 4,371,000 151,000
Inventories (1,528,000) 913,000
Other assets (452,000) (123,000)
Accounts payable (1,338,000) (803,000)
Accrued expenses (190,000) (610,000)
Deferred revenue (157,000) 666,000
--------------- -------------
Net cash provided by operating activities 873,000 1,190,000
--------------- -------------
Cash flows from investing activities:
Payments for purchases of property and equipment (411,000) (676,000)
--------------- -------------
Net cash used by investing activities (411,000) (676,000)
--------------- -------------
Cash flows from financing activities:
Payments under bank line of credit agreement (net) (462,000) (394,000)
Payments on notes payable - (141,000)
--------------- -------------
Net cash used by financing activities (462,000) (535,000)
--------------- -------------
Net change in cash - (21,000)
Cash at beginning of period 23,000 41,000
---------------- -------------
Cash at end of period $ 23,000 $ 20,000
================ =============
</TABLE>
See notes to unaudited consolidated financial statements.
24
<PAGE>
ANDATACO, INC.
Notes to Consolidated Financial Statements
(Unaudited)
NOTE 1 - Basis of Presentation
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
The accompanying unaudited consolidated financial statements of
Andataco, Inc. ("ANDA", or the "Company") have been prepared by the Company
without audit pursuant to the rules and regulations of the Securities and
Exchange Commission for Form 10-Q. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements and should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
annual report on Form 10-K for the year ended October 31, 1998. In the opinion
of management, the accompanying unaudited consolidated financial statements
contain all adjustments, consisting of only normal recurring items, necessary
for a fair presentation of the Company's financial position as of April 30, 1999
and its results of operations for the six-month periods ended April 30, 1999 and
1998. The interim financial information contained herein is not necessarily
indicative of the results to be expected for any other interim period or the
full fiscal year ending October 31, 1999.
NOTE 2 - Business Combination
On June 3, 1997 (the "Closing Date"), ANDA (formally IPL Systems, Inc.)
completed a business combination with ANDATACO of California, whereby ANDATACO
of California was merged with a wholly-owned subsidiary of ANDA (the "Merger").
Under the terms of the merger agreement, the shareholders of ANDATACO of
California were issued a total of 18,078,381 shares of ANDA Class A Common Stock
in exchange for all outstanding shares of capital stock of ANDATACO of
California. Although as a legal matter the Merger resulted in ANDATACO of
California becoming a wholly-owned subsidiary of ANDA, for financial reporting
purposes the Merger was treated as a recapitalization of ANDATACO of California
and an acquisition of ANDA by ANDATACO of California (reverse acquisition). The
financial reporting requirements of the Securities and Exchange Commission
require that the financial statements reported by ANDA subsequent to the Merger
be those of ANDATACO of California, which include the results of operations of
ANDA from the Closing Date.
The acquisition of ANDA by ANDATACO of California was accounted for
using the purchase method. Accordingly, the purchase price was allocated to the
estimated fair market value of identifiable tangible and intangible assets
acquired and liabilities assumed. Based upon an independent valuation, the
Company allocated $2,400,000 to acquired in-process research and development for
which there is no future alternative use and $400,000 to existing proprietary
technology for which technological feasibility had been established. As required
by generally accepted accounting principles, the amount allocated to in-process
research and development was recorded as a one-time charge to operations and the
amount allocated to existing technology was amortized over its estimated useful
life. The excess of the purchase price over the identifiable net assets acquired
of $8,362,000 was recorded as goodwill and is being amortized on a straight-line
basis over its estimated useful life of five years.
NOTE 3 - Net Loss Per Share
Basic earnings per share is computed based on the weighted average
number of shares of common stock outstanding during the period. Diluted earnings
per share is computed based on the weighted average number of shares of common
stock outstanding during the period increased by the weighted average number of
common stock equivalents outstanding during the period, using the treasury stock
method. Shares issuable upon exercise of outstanding stock options and warrants,
totaling 2,654,430 and 2,645,690 as of April 30, 1999 and 1998, respectively,
have been excluded from the computation of diluted earnings per share, as their
effect would be anti-dilutive.
25
<PAGE>
NOTE 4 - Inventories
April 30,
1999
----
(unaudited)
Inventories are comprised of the following:
Purchased components $5,710,000
Work in progress 114,000
Finished goods 627,000
-------------
$6,451,000
=============
NOTE 5 - Borrowings
The Company has a revolving line of credit ("the Line of Credit") with
a bank which provides for the Company to borrow the lesser of (i) $10,000,000 or
(ii) 80 percent of eligible domestic accounts receivable plus the lesser of
$1,750,000 or 25 percent of eligible inventory, at the bank's prime rate plus
one-half percent (8.5 percent at October 31, 1998). The Line of Credit was
renewed in April 1998 for a thirty-six month period. The Line of Credit is
secured by all of the Company's property and accounts receivable and is
guaranteed by the Company's principal shareholder. At April 30, 1999, the
Company was not in compliance with the financial covenant concerning the
Company's minimum net tangible worth; however, effective June 11, 1999, the
lender notified the Company that it will temporarily waive its rights and
remedies in connection with the foregoing default, to declare a default subject
to further negotiations. The lender and the Company are currently negotiating
the terms and conditions of the waiver, which will include applying a default
interest rate of 10.5% during the waiver period.
NOTE 6 - Subsequent Event
On June 9, 1999, nStor Technologies, Inc. acquired the 75.7% of the
Company's common stock held by the Company's principal shareholder.
26
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma condensed combined financial statements
reflect: (i) the acquisition of approximately 76% of the outstanding common
stock of Andataco, Inc. ("Andataco") and (ii) the private placement of $3.5
million of convertible preferred stock, both of which were completed on June 8,
1999 (the "Completed Transactions"), and (iii) the anticipated acquisition of
the remaining approximately 24% of the outstanding common stock of Andataco
("Anticipated Acquisition of Minority Shares") from Andataco's minority
shareholders (collectively, the "Transactions"). They are derived from and
should be read in conjunction with the historical financial statements and notes
thereto of the Company, as presented in the Company's Form 10-Q for the quarter
ended March 31, 1999 and Annual Report on Form 10-K for the year ended December
31, 1998. They should also be read in conjunction with Andataco's historical
financial statements, included elsewhere herein.
The acquisition of Andataco will be accounted for as a purchase with assets
acquired and liabilities assumed recorded at fair value, and Andataco's
operating results included in the Company's consolidated financial statements,
effective as of the dates of acquisition.
The unaudited pro forma condensed combined statements of operations for the year
ended December 31, 1998 and for the three months ended March 31, 1999 give
effect to the Transactions as if they had occurred as of January 1, 1998. The
unaudited pro forma condensed combined balance sheet as of March 31, 1999
assumes the Transactions were consummated on March 31, 1999. The pro forma
adjustments are based on management's preliminary estimates of the value of
tangible and intangible assets acquired. A valuation of those assets is
currently being conducted and, accordingly, those estimates could change as
additional information becomes available or as additional events occur.
The unaudited pro forma financial information is not designed to represent and
does not represent what the combined results of operations or financial position
would have been had the Transactions been completed as of the dates assumed, and
are not intended to project the combined results of operations for any future
period or the combined financial position as of any future date. The unaudited
pro forma condensed combined financial statements do not reflect certain
non-recurring expenses that may result from the acquisition, and also exclude
estimated expense reductions, including elimination of duplicate facilities and
personnel costs, that are expected to result from the acquisition.
27
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
(in thousands)
<TABLE>
<CAPTION>
Historical Pro Forma
------------------------------------- -----------------------------------------------
Anticipated
nStor Acquisition
Technologies Andataco Completed Of Minority
March 31,1999 January 31,1999 Transactions (1) Shares (2) Combined
------------- --------------- ---------------- ---------- --------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash $ 244 $ 23 $ 2,450 $ (150) $2,567
- -
Accounts receivable, net 2,313 7,625 - - 9,938
Inventories 3,714 5,441 - - 9,155
Other current assets 935 809 - - 1,744
--------------- --------------- ----------------- ------------ --------------
-
Total current assets 7,206 13,898 2,450 (150) 23,404
Property and equipment 1,509 3,248 - - 4,757
Goodwill and other intangible
assets, net 5,831 5,575 4,497 1,496 17,399
Other assets 500 51 - - 551
--------------- --------------- ----------------- ------------ --------------
$15,046 $22,772 $ 6,947 $ 1,346 $ 46,111
=============== =============== ================= ============ ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable, accrued
expenses and other $3,049 $9,014 $ - $ - $12,063
Current portion of long
term debt 165 - - - 165
Deferred revenue - 1,957 - - 1,957
--------------- --------------- ----------------- ------------ --------------
Total current liabilities 3,214 10,971 - - 14,185
Long-term debt 7,563 10,196 (96) - 17,663
Minority interests 294 (294) -
Shareholders' equity 4,269 1,605 6,749 1,640 14,263
--------------- --------------- ----------------- ------------ --------------
$15,046 $22,772 $ 6,947 $1,346 $46,111
=============== =============== ================= ============ ==============
</TABLE>
See accompanying notes to unaudited pro forma condensed combined financial
statements.
28
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Historical Pro Forma
----------------------------- -----------------------------------------------------------
NStor
Technologies Andataco Anticipated
Year Ended Year Ended Acquisition
December 31, October 31, Completed Of Minority
1998 1998 Transactions Shares Combined
-------------- ------------- --------------- ---------------- -------------
<S> <C> <C> <C> <C> <C>
Sales $ 18,026 $ 77,519 $ - $ - $95,545
Cost of sales 15,258 54,293 - - 69,551
-------------- ------------- --------------- ---------------- -------------
Gross profit 2,768 23,226 - - 25,994
-------------- ------------- --------------- ---------------- -------------
Operating expenses:
Selling, general and
administrative 8,335 19,700 - - 28,035
Research and development 2,572 1,552 - - 4,124
Depreciation and amortization 1,352 3,387 (346) (3) 178 (7) 4,571
-------------- ------------- --------------- ---------------- -------------
Total operating expenses 12,259 24,639 (346) 178 36,730
-------------- ------------- --------------- ---------------- -------------
(Loss) income from operations (9,491) (1,413) 346 (178) (10,736)
Interest income 71 - - - 71
Interest expense (987) (1,021) - - (2,008)
-------------- ------------- --------------- ---------------- -------------
(Loss) income before minority
interests (10,407) (2,434) 346 (178) (12,673)
Minority interests - - 584 (4) (584) (8) -
-------------- ------------- --------------- ---------------- -------------
Net (loss) income (10,407) (2,434) 930 (762) (12,673)
Preferred stock dividends (263) - (652) (5) - (915)
Embedded dividend attributable
to beneficial conversion
privilege of convertible
preferred stock and
accretion of warrants (1,218) - (150) (6) - (1,368)
-------------- ------------- --------------- ---------------- -------------
Net (loss) income applicable to
common stock $ (11,888) $ (2,434) $ 128 (762) $(14,956)
============== ============= =============== ================ =============
Basic and diluted net
loss per common share $ (0.63) $ (0.77)
============== =============
Average number of common
shares outstanding, basic
and diluted 18,888,911 - 547,000 (9) 19,435,911
============== =============== ================= =============
</TABLE>
See accompanying notes to unaudited pro forma condensed combined financial
statements.
29
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Historical Pro Forma
------------------------------- -------------------------------------------------------
nStor
Technologies Andataco
Three Months Three Months Anticipated
Ended Ended Acquisition
March 31, January 31, Completed Of Minority
1999 1999 Transactions Shares Combined
-------------- ------------- --------------- ---------------- -------------
<S> <C> <C> <C> <C> <C>
Sales $ 1,411 $ 16,378 $ - $ - $ 17,789
Cost of sales 1,323 11,872 - - 13,195
-------------- --------------- ------------- --------------- -------------
Gross profit 88 4,506 - - 4,594
-------------- --------------- ------------- --------------- -------------
Operating expenses:
Selling, general and
administrative 1,435 3,765 - - 5,200
Research and development 519 322 - - 841
Depreciation and amortization 395 871 (87) (3) 45 (7) 1,224
-------------- --------------- ------------- --------------- -------------
Total operating expenses 2,349 4,958 (87) 45 7,265
-------------- --------------- ------------- --------------- -------------
(Loss) income from operations (2,261) (452) 87 (45) (2,671)
Interest income 100 - - - 100
Interest expense (310) (245) - - (555)
-------------- --------------- ------------- --------------- -------------
(Loss) income before minority
interests (2,471) (697) 87 (45) (3,126)
Minority interests - - 167 (4) (167) (8) -
-------------- --------------- ------------- --------------- -------------
Net (loss) income (2,471) (697) 254 (212) (3,126)
Preferred stock dividends (132) - (183) (5) - (315)
Embedded dividend attributable
to beneficial conversion
privilege of convertible
preferred stock and
accretion of warrants (87) - - - (87)
-------------- --------------- ------------- --------------- -------------
Net (loss) income applicable to
common stock $ (2,690) $ (697) $ 71 $ (212) $ (3,528)
============== =============== ============= =============== =============
Basic and diluted net
loss per common share $ (0.13) $ (0.16)
============== =============
Average number of common
shares outstanding, basic
and diluted 21,182,665 - 547,000 (9) 21,729,665
============== ============= =============== =============
</TABLE>
See accompanying notes to unaudited pro forma condensed combined financial
statements.
30
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS
Adjustments to Unaudited Pro Forma Condensed Combined Balance Sheet:
(1) Adjustments resulting from Completed Transactions:
(a) The purchase from W. David Sykes and affiliates ("Sykes') on June
8, 1999 (the "Closing Date") of approximately 76% of the outstanding common
stock of Andataco and a $5,196,000 note ("Shareholder Note"), in exchange for
(1) $500,000 cash; (2) $5.1 million of 9 1/2% notes, payable June 2004; and (3)
$4,654,000 of preferred stock, convertible into 1,551,333 shares of the
Company's common stock (based on a conversion price of $3 per common share, the
closing market price on June 7, 1999, the date the terms of the preferred stock
were agreed to). In addition, the Company issued three year warrants to purchase
155,133 shares of the Company's common stock, at $3.30 per common share, valued
at approximately $200,000 using the Black Scholes option pricing model. The
preferred stock requires quarterly dividends at the following annual rates: 8%
during the first year, 9% during the second year and 10% thereafter.
(b) Issuance to private investors of $3.5 million of preferred stock
(convertible into 1,166,667 shares of the Company's common stock based on a
conversion price of $3 per common share, the closing market price on June 7,
1999, the date the terms of the preferred stock were agreed to) and three year
warrants to purchase 116,667 shares of the Company's common stock at $3.30 per
common share, valued at approximately $150,000 using the Black Scholes option
pricing model, in exchange for $3.5 million in cash. The preferred stock
requires dividends at the following annual rates: 8% during the first year, 9%
during the second year and 10% thereafter.
The adjustments to historical assets and liabilities for the Completed
Transactions follow (in thousands):
<TABLE>
<CAPTION>
Increase in cash:
<S> <C> <C> <C>
Private placement of preferred stock $3,500
Cash paid to Sykes (500)
Estimated transaction costs, principally professional fees (550) $2,450
-------------
Increase in goodwill:
Purchase price of net assets acquired:
Cash $500
Notes payable 5,100
Preferred stock 4,654
Warrants 200
Estimated transaction costs 550
--------------
Total purchase price 11,004
Less preliminary estimate of fair value of net assets acquired 932
--------------
Excess of purchase price over fair value of net assets acquired 10,072
(goodwill)
Elimination of Andataco's historical goodwill (5,575) 4,497
-------------
Decrease in long-term debt:
Purchase of Shareholder Note from Sykes 5,196
Issuance of notes to Sykes at closing (5,100) 96
-------------
Minority interests (24%) in Andataco (294)
Increase in shareholders' equity:
Issuance of preferred stock to Sykes and private investors (8,154)
Issuance of warrants to Sykes (200)
Elimination of Andataco's historical net assets 1,605 (6,749)
------------- -------------
$ 0
=============
</TABLE>
31
<PAGE>
(2) Adjustments resulting from the Anticipated Acquisition of Minority
Shares. The Company has agreed that if it acquires the Minority Shares,
the purchase price will be equal to the greater of the per share amount
paid to Sykes ($.283) or the fair market value as determined by an
independent valuation. Such valuation has not yet been completed;
accordingly, the purchase price reflected in the pro forma adjustments
($1,640,000) is based on the per share amount paid to Sykes. In
addition, estimated transaction costs of $150,000 have been included.
The Company intends to issue common stock in exchange for the Minority
Shares.
Adjustments to Unaudited Pro Forma Condensed Combined Statements of Operations:
Adjustments resulting from Completed Transactions:
(3) Elimination of amortization of goodwill included in Andataco's
historical statements of operations ($1,672,000 and $418,000 for the
year ended October 31, 1998 and the three months ended January 31,
1999, respectively), less amortization of excess of purchase price over
fair value of Andataco's net assets acquired over seven years
($1,326,000 and $331,000, respectively).
(4) Minority interests (24%) in loss of Andataco.
(5) Cash dividends on $8,154,000 of preferred stock issued to Sykes and
private investors (8% during the year ended December 31, 1998 and 9%
during the three months ended March 31, 1999).
(6) Embedded dividend attributable to accretion of value ($150,000) of
three year warrants to purchase 116,667 shares of the Company's common
stock issued to private investors on June 8, 1999. The warrants are
exercisable at any time through June 8, 2002.
Interest expense has not been adjusted since the adjustment would
not be material. Pro forma basic and diluted net loss per common share,
excluding the effect of the Anticipated Acquisition of Minority Shares, equals
$0.62 and $0.12 for the year ended December 31, 1999 and three months ended
March 31, 1999, respectively.
Adjustments resulting from the Anticipated Acquisition of Minority
Shares:
(7) Additional amortization of goodwill resulting from amortization of
excess of purchase price of Minority Shares ($1,790,000, including
$150,000 of transaction costs) over fair value of net assets acquired
($544,000) over seven years.
(8) Reversal of minority interests in loss of Andataco.
(9) Number of shares of the Company's common stock expected to be issued in
exchange for Minority Shares based on a recent closing market price ($3
on June 17, 1999).
32
<PAGE>
Exhibit Index
-------------
<TABLE>
<CAPTION>
Exhibit No.:
------------
<S> <C>
2.1 Purchase Agreement, dated as of March 2, 1999, by and among
the Registrant, W. David Sykes and the Sykes Children's Trust of 1993 dated November 22, 1993
2.2 Amendment No. 1 to Purchase Agreement, dated as of April 26, 1999, by and among the
Registrant, W. David Sykes, the Sykes Family Trust and the Sykes Children's Trust of 1993
dated November 22, 1993
2.3 Amendment No. 2 to Purchase Agreement, dated as of June 8, 1999, by and among the Registrant,
W. David Sykes, the Sykes Family Trust and the Sykes Children's Trust of 1993 dated November
22, 1993
4.1 Certificate of Designation of Series E Convertible Preferred Stock of the Registrant
4.2 Certificate of Designation of Series F Convertible Preferred Stock of the Registrant
4.3 Warrant, dated June 8, 1999, issued to W. David Sykes
4.4 Form of Warrant, dated June 8, 1999, issued to purchasers of Series E Convertible Preferred
Stock
4.5 9.5% Subordinated Note, dated June 8, 1999, issued to the Sykes Children's Trust of 1993
4.6 9.5% Subordinated Note, dated June 8, 1999, issued to the Sykes Family Trust
4.7 Registration Rights Agreement, dated June 8, 1999, by and between nSTOR Technologies, Inc.
and W. David Sykes
4.8 Form of Registration Rights Agreement, dated June 8, 1999, issued to the purchasers of Series
E Convertible Preferred Stock
4.9 Form of Employment Agreement between the Registrant and W. David Sykes
4.10 Letter Agreement, dated June 8, 1999, by and between Irwin Levy and W. David Sykes
99.1 Press Release issued by the Registrant on June 9, 1999
</TABLE>
PURCHASE AGREEMENT
This PURCHASE AGREEMENT (the "Agreement") is entered into as of the 2nd
day of March, 1999 by and between nSTOR TECHNOLOGIES, INC., a Delaware
corporation ("nStor"), and W. DAVID SYKES, an individual ("D. Sykes"), and the
SYKES CHILDREN'S TRUST OF 1993 dated November 22, 1993 (the "Trust"). D. Sykes
and the Trust are referred to herein together as "Sykes," and Sykes, D. Sykes,
the Trust and nStor are sometimes referred to herein individually as a "Party,"
and together as the "Parties".
RECITALS
Sykes is collectively the owner of 18,021,281 shares of the common
stock (the "Shares") of Andataco, Inc., a Massachusetts corporation
("Andataco"), and D. Sykes is the owner of a certain promissory note of Andataco
owned by and payable to D. Sykes in the face amount of $5,196,000 (the "Note").
Sykes wishes to sell the Shares and D. Sykes wishes to sell the Note to
nStor and D. Sykes wishes to enter into an employment agreement with nStor, and
nStor wishes to purchase the Shares and the Note from Sykes and D. Sykes and
enter into an employment agreement with D. Sykes, all upon the terms and subject
to the conditions provided herein.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants and agreements
and the payment of valuable consideration as provided herein, and intending to
be legally bound, the Parties agree as follows:
1. Purchase of the Shares by nStor
Sykes agrees to sell, assign, transfer and convey the Shares to nStor,
and nStor agrees to purchase the Shares from Sykes, for a cash purchase price of
$3,000,000 (the "Stock Purchase Price"), payable on the Closing (as hereinafter
defined) by wire transfer or certified check and allocable between the Trust and
D. Sykes in proportion to their ownership of the Shares, subject to the terms
and conditions of this Agreement.
2. Purchase of the Note by nStor
(a) D. Sykes agrees to sell, assign, transfer and convey the Note to
nStor, and nStor agrees to purchase the Note from D. Sykes, for a cash purchase
price of $5,000,000 (the "Note Purchase Price"), payable on the Closing by wire
transfer or certified check, subject to the terms and conditions of this
Agreement. D. Sykes agrees to accept the Note Purchase Price in full payment for
the assignment, transfer and conveyance of the Note and full payment and
satisfaction of any and all other indebtedness, obligations and liabilities of
Andataco to D. Sykes, whether due, accrued or contingent, including, without
limitation, payments by Andataco to D. Sykes for retirement benefits
(collectively, the "Indebtedness"). Nothing in this Section 2(a) shall affect in
any manner any vested rights of D. Sykes in any Andataco retirement plans and D.
Sykes shall be entitled to control all investments in such Andataco retirement
plans.
(b) The Indebtedness shall not include the Note, the Employment
Agreement between D. Sykes and Andataco dated as of May 1, 1997 (the "Andataco
Employment Agreement"), the Noncompetition Agreement between Andataco and D.
Sykes dated as of
1
<PAGE>
June 3, 1997 (the "Noncompetition Agreement"), or any participation by Andataco
in the Employment Agreement described in Section 3 hereof. If requested by nStor
or Andataco, at any time on or after the Closing Date (as hereinafter defined),
D. Sykes shall execute and deliver to Andataco an unconditional general release
and all original instruments evidencing the Indebtedness marked "paid in full,"
subject only to the exceptions provided in the immediately preceding sentence,
and D. Sykes shall execute and deliver such other agreements, instruments and
documents as counsel to nStor or Andataco may reasonably request to further
evidence the payment, discharge and satisfaction of the Indebtedness. In the
event that nStor or any of its subsidiaries or affiliates acquires all
outstanding shares of voting stock of Andataco in addition to the Shares, D.
Sykes shall immediately enter into a written agreement with Andataco
terminating, and execute and deliver to Andataco an unconditional general
release as to, the Noncompetition Agreement. Nothing contained in this Section 2
shall affect in any manner the right of D. Sykes, as an officer and director of
Andataco, to indemnification by Andataco as presently provided or to coverage
under the current Andataco director and officer insurance policy.
3. Employment of D. Sykes.
(a) Sykes and nStor's wholly owned subsidiary, nStor Corporation (the
"Company") shall enter into an employment agreement in the form attached hereto
as EXHIBIT A (the "Employment Agreement"), effective on the date on which nStor
or any of its subsidiaries or affiliates acquires all outstanding voting stock
of Andataco in addition to the Shares. nStor shall cause the Company to execute
and deliver the Employment Agreement. The Employment Agreement shall be executed
on the Closing Date by D. Sykes and the Company and delivered to counsel for
nStor and D. Sykes to jointly hold in escrow on behalf of nStor and D. Sykes,
respectively, and to date and deliver to D. Sykes and the Company upon the
occurrence of the condition set forth in the first sentence of this Section
3(a).
(b) D. Sykes shall also continue to be employed by Andataco in his
present capacity pursuant to the Andataco Employment Agreement as provided in
Section 1(b) of the Employment Agreement. In addition, so long as the Andataco
Board of Directors determines that it does not constitute a breach of the
Noncompetition Agreement, D. Sykes agrees that, commencing on the Closing Date
and during the time that he continues to be employed by Andataco before the
Employment Agreement is executed and delivered, he will perform services for the
Company on a "loaned executive" basis, substantially the same as his
responsibilities and duties as described in the Employment Agreement and in
consideration of the "Compensation" as defined and provided in Section 1(b)(ii)
of the Employment Agreement; provided, however, that (a) in the event Sykes
receives total compensation from the Company and Andataco in excess of the
Compensation payable to Sykes during such period of time (including, without
limitation, payments under the Noncompetition Agreement prior to its termination
as provided in Section 2 hereof), such excess shall be repaid by deductions from
any bonus compensation due D. Sykes for the period ended December 31, 1999
pursuant to Section 3(b) of the Employment Agreement; provided further, however,
that if the excess exceeds the bonus compensation payable for that period, it
shall not carryover in the next bonus period and D. Sykes shall keep such
excess, and (b) the grant of the Option pursuant to Section 4 of the Employment
Agreement shall be retroactive to the Closing Date . Further, D. Sykes agrees to
enter into an Amended and Restated Andataco Employment Agreement as provided in
Section 1(b)(iii) of the Employment Agreement.
4. Agreement Not to Compete
2
<PAGE>
D. Sykes recognizes that (i) Andataco has spent substantial money, time
and effort in developing and solidifying its relationships with its suppliers
and customers, (ii) long-term supplier and customer relationships often can be
difficult to develop, (iii) Andataco paid and pays its employees to, among other
things, develop and preserve business information, supplier and customer
goodwill, loyalty and contacts for and on behalf of Andataco, and (iv) nStor is
hereby agreeing to purchase the Shares from Sykes based upon D. Sykes'
assurances and promises contained herein not to take or divert Andataco's
suppliers' and customers' goodwill, including such suppliers' and customer's
goodwill as part of the combined businesses of Andataco and the Company as
contemplated by this Agreement and the Employment Agreement (for the purpose of
this Section 4, all references to the Company shall be deemed to be references
to the Company and Andataco). Accordingly, D. Sykes covenants and agrees that
for lesser of a period of three years following the Closing Date or a period of
one year following the termination for any reason of his employment by the
Company (or any successor to the business of the Company), he will not, directly
or indirectly:
(a) engage, either as principal, agent or consultant, or through any
corporation, firm, organization or other entity (a "Competitive Entity") in
which he may be an officer, director, employee, stockholder, partner, member, or
with which he is otherwise affiliated, in any activity or business that is in
competition with the business of the Company in any geographic area in the
United States or in any other country where the Company is doing business;
(b) on behalf of any Competitive Entity, solicit, call on, or in any
manner cause or attempt to cause or provide any Confidential Information (as
defined in the Employment Agreement) to any customer or active prospective
customer of the Company, or divert, terminate, limit, modify or fail to enter
into any existing or potential relationship between the Company and any customer
or active prospective customer of the Company; or
(c) induce or attempt to induce any employee, consultant or advisor of
the Company to accept employment or an affiliation with any Competitive Entity.
D. Sykes agrees that if he violates any of the provisions of this Section 4, the
Company would sustain irreparable harm and, therefore, in addition to any other
remedies that might be available to it, the Company shall be entitled to an
injunction restraining D. Sykes from committing or continuing any such violation
without the requirement to post a bond or other security. The Company and D.
Sykes agree that in the event any of the provisions of this Section 4 shall be
held to be in any way an unreasonable restriction on D. Sykes, the court so
holding may reduce the geographical area and/or period of time in which such
provision operates, or modify or eliminate any such restriction to the extent
necessary to render such provisions enforceable. Nothing in this Section 4 shall
be deemed to negate or limit in any manner the covenants and agreements of D.
Sykes pursuant to Section 6 of the Employment Agreement, but shall be in
addition thereto.
3
<PAGE>
5. Representations and Warranties of Sykes
In order to induce nStor into entering into this Agreement and to
purchase the Shares and the Note, Sykes hereby represent and warrant to nStor,
which representations and warranties shall remain true and correct on the
Closing Date, and covenant and agree with nStor, as follows:
(a) D. Sykes shall fully cooperate and use his reasonable best efforts
to cause Andataco and its employees to fully cooperate with the conduct of due
diligence as described in Section 7(a) hereof.
(b) Sykes are, and on the Closing Date will be, the owners of the
Shares, free and clear of any and all liens, claims, encumbrances and
restrictions, and the Shares may be sold, assigned, transferred and conveyed to
nStor without the requirement of any consent or approval by Andataco or any
other party, including, without limitation, the consent or approval of any party
whose failure to give such consent or approval would have an adverse effect on
Andataco, other than consents or approvals that shall be obtained by Sykes and
delivered to nStor on or before the Closing.
(c) The Note is assignable by D. Sykes to nStor without the requirement
of any consent or approval by Andataco or any other party, and upon the purchase
of the Note by nStor shall be the valid and binding obligation of Andataco and
enforceable by nStor in accordance with its terms in the same manner as if owned
by D. Sykes.
(d) When executed and delivered by Sykes, this Agreement will
constitute a valid and legally binding obligation of Sykes enforceable in
accordance with its terms, except as may be limited by (i) judicial principles
respecting election of remedies or limiting the availability of specific
performance, injunctive relief and other equitable remedies, (ii) judicial
principles with respect to provisions contrary to public policy, and (iii)
bankruptcy, insolvency, reorganization, moratorium or other similar laws, now or
hereafter in effect, generally relating to creditors' rights.
(e) To Sykes' knowledge, Andataco is duly organized, validly existing
and in good standing under the laws of the Commonwealth of Massachusetts and is
qualified to do business and in good standing in each other jurisdiction where
the business of Andataco requires it to be so qualified, including, without
limitation, the State of California. To Sykes' knowledge, Andataco has all
requisite corporate power and authority to own its assets and to carry on its
business as presently conducted in each jurisdiction where such assets is
located and such business is conducted.
(f) Attached hereto as EXHIBIT B is a copy of Andataco's Form 10-K for
the fiscal year ended October 31, 1998 (the "1998 10-K") and its Form 10-Q for
the quarter ended January 31, 1999. The 1998 10-K does not contain any untrue
statement of a material fact or omit to state any material fact necessary in
order to make each statement contained therein not misleading. From and after
January 31, 1999, to D. Sykes' knowledge, no events have occurred or are
threatened that would materially affect the financial condition, assets or
business of Andataco.
(g) As of the date of this Agreement, Andataco's only authorized
capital stock consists of the common and preferred stock as described in the
1998 10-K, and there are no issued shares of any class of voting stock of
Andataco other than the class of which the Shares are a part. Of the authorized
common stock, 23,819,399 shares are issued and outstanding
4
<PAGE>
and of these 18,021,281 shares are owned by Sykes and constitute the Shares. The
Shares constitute the only common stock of Andataco in which Sykes has a direct
or beneficial interest. The 1998 10-K accurately and fairly describes Andataco's
1997 Equity Incentive Plan, as amended (the "Plan"). The Plan, the Andataco 1996
Stock Option Plan, the Andataco 1993/1991 Stock Option Plan, the Andataco
Director Stock Option Plan and the 180,000 warrants issued to Imperial "Bar,"
are the only plans, agreements or commitments of Andataco to issue additional
authorized capital stock.
(h) Sykes shall not, between the date hereof and the Closing Date,
accept from Andataco any compensation or other payments or benefits from
Andataco, including, without limitation, accrued but unpaid compensation, other
than compensation for services on a current basis.
(i) Sykes shall, between the date hereof and the Closing Date: (i)
cause the business of Andataco to be conducted in the ordinary course, (ii) not
cause Andataco to have any material change in its business, financial condition
or assets, (iii) not cause, by request to the Andataco Board of Directors or
otherwise, Andataco to grant any options or other rights to acquire any capital
stock of Andataco, or issue any capital stock of Andataco to any person, or
enter into any employment agreements with any persons.
6. Representations and Warranties of nStor
In order to induce Sykes to enter into this Agreement and to sell the
Shares and the Note, nStor represents and warrants to Sykes as of the date
hereof, and as of the Closing Date, and covenants and agrees with Sykes, as
follows:
(a) nSTOR is a corporation duly organized, validly existing and in good
standing within the laws of the State of Delaware and has all requisite and
corporate authority to carry on business as it is now carried on and conducted.
When executed and delivered by nStor, this Agreement will constitute a valid and
legally binding obligation of nStor enforceable in accordance with its terms,
except as may be limited by (i) judicial principles respecting election of
remedies or limiting the availability of specific performance, injunctive relief
and other equitable remedies, (ii) judicial principles with respect to
provisions contrary to public policy, and (iii) bankruptcy, insolvency,
reorganization, moratorium or other similar laws, now or hereafter in effect,
generally relating to creditors' rights.
(b) nSTOR expressly represents and warrants as of the Closing Date
that: (i) it is acquiring the Shares and the Note for investment purposes only,
for its own account, and not with the view to, or for resale in connection with,
any distribution thereof, (ii) it has such knowledge and experience in financial
and business matters that it is capable of evaluating the merits and risks of
this investment and is able to bear the economic risk of this investment, (iii)
its purchase of the Shares and the Note has not been accompanied by the
publication of any advertisement, (iv) its purchase of the Shares and the Note
has not been effected by or through a broker-dealer in a public offering. On the
Closing Date, nStor will separately represent and warrant in writing to Sykes,
if then true, that: (v) it has had the opportunity to ask questions of the
directors, officers and employees of Andataco and has obtained and carefully
reviewed and considered all the information regarding Andataco that nSTOR
considers necessary or appropriate to decide whether to purchase the Shares and
the Note, and (vi) Sykes and Andataco have provided nSTOR with access to all
financial information, records, documents, contracts, agreements, court filings,
case records and ledgers relating to Andataco.
5
<PAGE>
(c) nSTOR (i) has adequate means of providing for its current needs and
possible contingencies, and has no need now, and anticipates no need in the
foreseeable future, to sell the Shares or the Note which it is hereby purchasing
and (ii) is able to bear the economic risks of this investment, and,
consequently, without limiting the generality of the foregoing, is able to hold
its Shares and the Note indefinitely and has a sufficient net worth to sustain a
loss of its entire investment in Andataco in the event such loss should occur.
(d) nSTOR acknowledges and agrees that neither the Shares nor the Note
have been registered under the Securities Act of 1933, as amended (the "Act") or
under the California Corporate Securities Law of 1968, as amended (the
"California Law") or other applicable law, and that accordingly the Shares and
the Note will not be fully transferable except as permitted under various
exemptions contained in the Act, California Law or other applicable state law,
or upon satisfaction of the registration requirements of the Act, the
qualification requirements of California Law or other applicable state law, or
the registration requirements of other applicable state securities laws. nSTOR
hereby acknowledges and agrees that the certificates representing the Shares and
the Note will bear any legends required under the Act, California Law or other
applicable state law.
(e) If nStor acquires the common stock of Andataco held by shareholders
other than Sykes, it will do so for consideration no less than the greater of
the price per share received by Sykes for the Shares or the fair market value of
such stock valued as of the day immediately prior to the date of execution of
this Agreement as stated in an opinion obtained prior to such acquisition from a
recognized investment banking firm. nStor agrees that the shareholders of
Andataco other than Sykes shall be given and advised of their "dissenter's"
rights, as provided under Massachusetts law and all other applicable law, in
connection with any acquisition by nStor of their shares of Andataco stock.
7. Due Diligence; Standstill; Confidentiality; Disclosure
(a) Commencing with the date hereof, nStor shall conduct due diligence
as to Andataco and Sykes and Andataco's organization, properties, financial
condition and operations, upon reasonable notice and during normal business
hours. Sykes shall cooperate with nStor in the conduct of such due diligence,
and provide such documents and information as may reasonably be requested. nStor
agrees to use its best efforts to complete such due diligence, use its
reasonable best efforts to obtain financing necessary for it to consummate the
transactions contemplated by this Agreement (the "nStor Financing") and complete
its preparations to close the transactions contemplated by this Agreement,
within 30 days following the date of this Agreement (the "30 Day Period"). nStor
shall be entitled to a 20 day extension of the 30 Day Period (the "20 Day
Period") upon the payment to Sykes of a non-refundable cash deposit in the
amount of $100,000 on or before the end of the 30 Day Period, which deposit
shall be applied against the Stock Purchase Price.
(b) In consideration of the expenses incurred and to be incurred by
nStor in conducting due diligence pursuant to Section 7(a), during the 30 Day
Period, and the 20 Day Period if applicable, Sykes shall not solicit or accept
offers from, nor shall he negotiate for or enter into any agreements with, any
other parties for the any of the transactions or agreements contemplated by this
Agreement.
(c) The existence and contents of this Agreement, the existence of
negotiations between the Parties and all documents and information obtained by
either Party from the other Party, regardless of identifying mark or label and
whether written, oral or in electronic form, shall remain strictly confidential
(the "Confidential Information"), and neither of the Parties shall
6
<PAGE>
reveal any of the Confidential Information or provide any copies of any
documents or other materials relating to the Confidential Information to any
person, corporation or other entity, other than the Board of Directors and
senior officers of and the attorneys and financial advisors for Andataco,
without the prior written consent of the providing Party.
(d) The Parties understand that the transactions provided herein will
require, pursuant to applicable securities and other laws, a public announcement
by nStor upon the execution and delivery of this Agreement by the Parties, and
the Parties have agreed upon a press release in the form attached hereto as
EXHIBIT C. This press release may be issued by nStor upon the execution and
delivery of this Agreement. Sykes also acknowledges that nStor will be required
to file a Schedule 13D pursuant to Rule 13d-1 of the Securities Exchange Act of
1934 upon obtaining the nStor Financing. In addition, attached hereto as EXHIBIT
D is a press release prepared by the Parties for publication upon a termination
of this Agreement and the transactions contemplated hereby. This press release
shall be issued by nStor immediately upon termination of this Agreement
according to its terms. The Parties agree that no deviation shall be made from
such press releases unless mutually agreed by the Parties. The Parties agree
that no other public disclosure shall be made by the Parties until the Closing
except upon the mutual consent of the Parties, unless counsel to nStor advises
nStor that it is legally required to make such disclosure or to respond to
requests for such disclosure and in either such event the Parties agree to use
their reasonable best efforts to mutually agree upon the wording of such
disclosure. Nothing in any public disclosure, shall be deemed in any way to
modify or limit in any way the provisions of Section 7(c).
(e) nStor shall maintain Andataco's current director and officer
insurance policy or equivalent for a period of two years after the Closing.
nStor shall not alter the current indemnification rights of Andataco officers
and directors until the sooner of (i) two years after the Closing or (ii) the
termination of the separate existence of Andataco.
8. Lease Guaranty
At the Closing, nStor agrees to execute a written guaranty, in form and
substance as nStor may reasonably agree, of Andataco's performance under the
real property lease between Syko Properties, Inc., a corporation owned and/or
controlled by D. Sykes, as lessor, and Andataco, as lessee, dated as of January
1, 1993, as amended, pursuant to which Andataco leases the premises in which it
conduct business in San Diego, California (the "Lease"); provided, however, that
nStor's obligation under this Section 8 is conditioned upon the Lease being
terminable by Andataco in its sole discretion at any time upon nine months
notice to the lessor.
9. Closing
The closing and consummation of all transactions provided in this
Agreement (the "Closing") shall take place at 10:00 A. M on the last day of the
30 Day Period, or the 20 Day Period if applicable, or, if such day is not on a
business day in the state where the Closing occurs, on the next business day
(the "Closing Date"), at the offices of Holland & Knight LLP, counsel to nStor,
One East Broward Boulevard, Suite 1300, Fort Lauderdale, Florida 33301, or on
such other day and at such other time and place as the Parties may mutually
agree.
10. Termination
nStor may terminate this Agreement for any reason in its sole and
absolute discretion at any time prior to the Closing Date upon notice to Sykes
that it has not obtained the nStor
7
<PAGE>
Financing and does not wish to proceed with the transactions contemplated by
this Agreement. Upon any such termination, the Parties shall have no further
obligations under this Agreement, except that the obligations of the Parties
under Section 6(c), Section 10 and Section 12 shall survive such termination.
11. Expenses
Each Party shall bear its and his own expenses, including legal and
accounting fees and costs, in connection with this Agreement and the Closing;
provided, however, that: (a) if the Closing occurs, nStor shall reimburse Sykes
for documented attorney, accountant and investment banking fees and expenses up
to the amount of $430,000, (b) if the Closing does not occur through no fault of
Sykes, nStor shall reimburse Sykes for documented attorney and accountant fees
and expenses up to the amount of $20,000, and (c) if the Closing does not occur
as a result of Sykes willfully and knowingly breaching any of his
representations and warranties in Section 5 hereof, Sykes shall indemnify and
hold harmless, and immediately reimburse, nStor for its costs and expenses,
including reasonable attorney's and accountant's fees and expenses, incurred in
the conduct of its due diligence under Section 7(a) hereof and in preparing for
the Closing.
12. Indemnification
a. Indemnification by nStor. nStor shall indemnify, defend and hold
harmless Sykes against any and all damages, losses, claims, liabilities,
charges, suits, penalties, costs and expenses, including court costs, attorneys'
fees and expenses and other costs of collection (collectively "Loss" or
"Losses"), which Sykes personally may sustain, or to which he may be subjected,
arising out of or attributable to: (i) the failure of nStor to consummate the
acquisition of the Shares and the Note for other than nStor's right to terminate
pursuant to Section 10 hereof; (ii) the failure of nStor or its officer,
directors, shareholders, affiliates, employees or agents to treat the minority
shareholders of Andataco, Inc. fairly or properly after the Closing.
b. Notice and Resolution of Indemnity Claims . If at any time Sykes
shall claim indemnification from nStor for any Loss or, in the reasonable
judgment of Sykes, for what, in the future, may result in a Loss ("Anticipated
Loss") due to the filing, at or before the time of such claim, of an action,
claim or suit with an arbitrator, mediator, court or other governmental entity
("Claim"), then Sykes shall send written notice of the same (a "Notice of
Claim") to nStor. A Notice of Claim shall specify the basis for such Claim
supported by relevant information and documentation.
(i) If nStor shall object to such Claim, it shall give written notice of
such objection (a "Notice of Objection") to Sykes within 15 days after receipt
by nStor of the Notice of Claim, specifying the basis of the objections
supported by relevant information and documentation with respect thereto. If
nStor does not give a Notice of Objection within such 15 days, or shall have
agreed to pay such Claim in whole or in part within such 15-day period, nStor
shall thereupon be liable for the payment of such Claim.
(ii) In the event that nStor shall have timely given a Notice of
Objection in whole or in part to any Notice of Claim, during the 20-day period
following that date, nStor and Sykes shall privately attempt to resolve the
Claim. If nStor and Sykes shall have failed to resolve or compromise or agree to
postpone resolution of the Claim within the 20--day period, then the Claim shall
be settled by arbitration in San Diego, California, as determined by the three
arbitrators referred to in Section 12(b)(iii) below, in accordance with the
rules of the American Arbitration Association and the procedures set forth
below.
8
<PAGE>
(iii) Each of (A) Sykes and (B) nStor shall appoint one arbitrator,
and the two arbitrators so appointed shall then together appoint a third
arbitrator ("neutral arbitrator") from a list of persons supplied by the
American Arbitration Association in San Diego, California. If one party shall
fail to appoint the arbitrator to be appointed by it within 15 days of the end
of the 20-day period provided for in Section 12(b)(ii) above, the arbitrator
appointed by the other party shall select from a list of persons supplied by the
American Arbitration Association a person who shall serve as the single neutral
arbitrator for purposes of the arbitration. If each party shall have appointed
one arbitrator; but such designees cannot agree on the person to act as the
neutral arbitrator within a period of 15 days after the appointment of the
second arbitrator, then either party may apply to the American Arbitration
Association in San Diego, California, which shall appoint a neutral arbitrator.
As used hereafter the term "arbitrator" shall include the singular and the
plural as applicable. The arbitrator shall conduct the arbitration with all
reasonable dispatch in accordance with the rules of the American Arbitration
Association, provided, however, that the parties to such arbitration shall take
such action and execute such instruments as shall be necessary to cause the
California Rules of Civil Procedure pertaining to pre-trial discovery to be
applicable in respect of such proceeding. The arbitrator shall render a written
award (the "Award") which shall be delivered to Sykes and nStor. An Award
hereunder may be used as a basis for the entry of judgment in any jurisdiction.
In the event the parties have submitted a Claim for an Anticipated Loss to
arbitration under this Section 12(b)(iii), then the arbitrator may, in its sole
discretion, postpone resolution of the Claim until the time which it has
determined, in its sole discretion, to be the time when such Anticipated Loss
shall have occurred or passed has been reached.
(iv) Prior to making the Award, the arbitrator shall direct Sykes
and nStor to submit statements describing any element of Loss or Anticipated
Loss as to which a Claim is made that is attributable to attorneys' fees,
disbursements, and any similar costs incident to such Loss or Anticipated Loss,
supported by affidavits showing that such costs actually have been or are likely
to be incurred, and all such attorneys' fees, disbursements and other costs
shall be apportioned as determined by the arbitrator. All fees of the arbitrator
and administrative expenses of the American Arbitration Association shall be
treated as costs for purposes of this Article. As a part of each Award made
pursuant to this Agreement, the arbitrator shall allow interest thereon (other
than on the portion of the Award representing attorneys' fees, disbursements and
costs) from the date of the Loss or the date the Anticipated Loss becomes a Loss
to the date of payment at the rate of 10% per annum.
(v) The Award shall be a conclusive determination of the matter and
shall be binding upon Sykes and nStor, and shall not be contested by either of
them. nStor shall satisfy its obligations to pay an Award in cash.
(vi) If a the subject of a Claim involves a third-party claim which
has not yet been determined, the arbitrator may in his discretion make a
separate determination solely as to whether the third-party claim is one for
which indemnification may be had or may defer a determination as to whether
indemnification may be had pending the further development of information as to
the nature of the third-party claim. If the arbitrator determines that the
third-party claim is not subject to indemnification, he shall set forth the
basis of his decision in detail, which decision shall be deemed to be an "Award"
hereunder.
(vii) Promptly after the assertion by any third party of any claim
against Sykes that, in the judgment of Sykes, may result in the incurrence by
Sykes of Loss for which Sykes would be entitled to indemnification, Sykes shall
deliver to nStor a Notice of Anticipated Loss describing in reasonable detail
such Claim. If Sykes request nStor defend him against such Claim, then nStor
may, at its option, assume the defense of Sykes against such
9
<PAGE>
Claim (including the employment of counsel, who shall be counsel satisfactory to
Sykes,) and the payment of expenses. If Sykes does not request nStor to defend
him against such Claim or nStor fails to assume the defense of such Claim within
a reasonable time after having been requested by Sykes to assume the defense,
then Sykes shall have the right to defend himself in any such action and, if
appropriate under Section 12(a) above, be indemnified for his costs and fees of
defense by nStor. nStor shall not be liable to indemnify Sykes for any
settlement of any such action or claim effected without the consent of nStor,
but if settled with the written consent of nStor, or if there be a final
judgment for the plaintiff in any such action, nStor shall indemnify and hold
harmless Sykes from and against any Loss by reason of such settlement or
judgment and nStor shall thereupon be liable for the payment of such Loss.
13. Conditions to Closing
(a) nStor's obligation to consummate the transactions contemplated by
this Agreement shall be subject to the fulfillment, at or prior to Closing, of
each of the following conditions precedent (any or all of which may be waived in
writing, in whole or in part, by nStor):
(i) Sykes shall have performed all of the obligations and
complied with all of the covenants required to be performed or to be
complied with by them under this Agreement on or prior to the Closing
Date.
(ii) Sykes shall have delivered to nStor any and all
approvals, consents or assignments to be obtained by Sykes and
necessary for the consummation of the transactions contemplated hereby.
(iii) nStor and its accountants, attorneys and other
representatives shall have had full and complete access during normal
business hours to all offices, facilities, properties, assets, books,
agreements, files and records of Andataco, including financial and
operating data and other information regarding Sykes and Andataco.
(iv) nStor shall have received the nStor Financing on or prior
to the Closing Date.
(v) There shall not have been instituted, pending or
threatened against Andataco, Sykes, nStor or the Company any suit,
action or other proceeding by any private party or governmental agency,
commission, bureau or body seeking to restrain or prohibit any of the
transactions contemplated by this Agreement.
(vi) D. Sykes shall have entered into Employment Agreement as
provided for in Section 3(a) hereof.
(vii) Each representation and warranty of Sykes contained in
this Agreement shall be true and correct both at the date on which this
Agreement is signed and at and as of the Closing Date as if made anew
at and as of such time.
(viii) There has not been any material adverse change in the
business, operations and financial conditions of Andataco from and
after the date of the 1998 10-K until the Closing Date.
(b) The obligations of Sykes to consummate the transactions
contemplated by this Agreement shall be subject to the fulfillment, at or prior
to Closing, of each of the following
10
<PAGE>
conditions precedent (any or all of which may be waived in writing, in whole or
in part, by Sykes):
(i) nStor shall have performed all of its obligations and
complied with all of its covenants required to be performed or to be
complied with by it under this Agreement on or prior to the Closing
Date.
(ii) nStor shall have delivered to Sykes any and all
approvals, consents or assignments to be obtained by nStor and
necessary for the consummation of the transactions contemplated hereby.
(iii) There shall not have been instituted, pending or
threatened against Andataco, Sykes, nStor or the Company any suit,
action or other proceeding by any private party or governmental agency,
commission, bureau or body seeking to restrain or prohibit any of the
transactions contemplated by this Agreement.
(iii) The Company shall have entered into Employment Agreement
as provided for in Section 3(a) hereof.
(iv) Each representation and warranty of nStor contained in
this Agreement shall be true and correct both at the date on which this
Agreement is signed and at and as of the Closing Date as if made at and
as of such time.
14. Miscellaneous
(a) Entire Agreement. This Agreement and the Employment Agreement, when
executed (collectively, the ?Party Agreements"), constitute the complete and
exclusive statement of the agreement between the Parties with respect to the
subject matter of the Party Agreements. The Party Agreements replace and
supersede all prior agreements and negotiations by and between the Parties and
each of the Parties acknowledges and agrees that no agreements, representations,
warranties or collateral promises or inducements have been made by or to it or
him except as expressly set forth in the Party Agreements. These acknowledgments
and agreements are contractual and not mere recitals.
(b) Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the Parties and their respective successors and
permitted assigns and Sykes' personal representatives, executors, administrators
and beneficiaries; provided, however, that neither Party shall assign this
Agreement or any of its or his rights or obligations hereunder without the prior
written consent of the other Party, which consent may be withheld or delayed in
the sole discretion of Party whose consent is requested.
(c) No Third Party Beneficiary. Nothing expressed or implied in this
Agreement is intended, or shall be construed, to confer upon or give any person,
firm, corporation, partnership, association or other entity, other than the
Parties and their respective successors and permitted assigns, any rights or
remedies under or by reason of this Agreement, except that Andataco shall be a
third party beneficiary and entitled to enforce in its own name the provisions
of the second and third sentences of Section 2.
(d) Survivability. Notwithstanding any investigation made by or on
behalf of either Party, the representations and warranties made under and in
connection with this Agreement shall survive the Closing and consummation of all
the transactions contemplated hereby for a period of one year.
11
<PAGE>
(e) Waivers and Remedies. The waiver by either of the Parties of the
other Party's prompt and complete performance, or breach or violation, of any
provision of this Agreement shall not operate nor be construed as a waiver of
any subsequent breach or violation, and the waiver by either of the Parties to
exercise any right or remedy which it may possess hereunder shall not operate
nor be construed as a bar to the exercise of such right or remedy by such Party
upon the occurrence of any subsequent breach or violation.
(f) Severability. The invalidity of any one or more of the words,
phrases, sentences, clauses, sections or subsections contained in this Agreement
shall not affect the enforceability of the remaining portions of this Agreement
or any part hereof, all of which are inserted conditionally on their being valid
in law, and, in the event that any one or more of the words, phrases, sentences,
clauses, sections or subsections contained in this Agreement shall be declared
invalid by a court of competent jurisdiction, this Agreement shall be construed
as if such invalid word or words, phrase or phrases, sentence or sentences,
clause or clauses, section or sections, or subsection or subsections had not
been inserted.
(g) Descriptive Headings/Recitals. Descriptive headings contained
herein are for convenience only and shall not control or affect the meaning or
construction of any provision of this Agreement. The Recitals are incorporated
into and made a part of this Agreement.
(h) Counterparts and Facsimile Signatures. This Agreement may be
executed in counterparts by the separate Parties, all of which shall be deemed
to be one and the same instrument. Facsimile signatures shall have the same
effect as original signatures.
(i) Notices. Any notice, request or other communication to either Party
by the other hereunder shall be deemed given on the earlier of the date (i)
actually received and acknowledged; (ii) three (3) days after its mailing by
certified or registered mail, return receipt requested, postage prepaid; or,
(iii) on the business day immediately following its delivery (evidenced by
receipt) to any reputable overnight carrier or transmission via facsimile in
each case addressed to the Party for which it is intended at the address (or
facsimile transmission number) set forth in this Agreement. The place to which
notices are to be given to any Party may be changed from time to time by such
Party by like notice to the other. Notices shall be addressed as follows:
If to nStor:
------------
H. Irwin Levy, Chairman
nStor Technologies, Inc.
100 Century Boulevard
West Palm Beach, FL 33417
Fax: (561) 640-3160
and
Lawrence Steffann, President
nStor Technologies, Inc.
450 Technology Park Boulevard
Lake Mary, FL 32746
Fax: (407) 829-3627
With a copy to:
12
<PAGE>
Holland & Knight LLP
One East Broward Boulevard
Suite 1300
Fort Lauderdale, FL 33301
Attn: Timothy C. Leixner, Esq.
Fax: (954) 463-2030
If to Sykes:
------------
W. David Sykes
C/o Andataco, Inc.
10140 Mesa Rim Road
San Diego, CA 92121
Fax: (619) 453-2676
With a copy to:
Luce, Forward, Hamilton & Scripps LLP
600 West Broadway, Suite 2600
San Diego, California 92101
Attn: Dennis J. Doucette, Esq.
Fax: (619) 232-8311
(j) Applicable Law. This Agreement shall be governed by, and shall be
construed, interpreted and enforced in accordance with, the laws of the State of
Florida, without regard to principles of conflict of laws.
(k) Brokers and Agents. nStor represents to Sykes that no broker,
finder or agent has acted on behalf of nStor with respect to the transactions
provided in the Party Agreements, and agrees to indemnify and hold Sykes
harmless in the event of any loss, claim, demand or expense asserted against or
incurred by Sykes relating to the payment of any fees or commissions by any such
broker, finder or agent acting on behalf of nStor. Other than as provided in
Section 10(a) hereof, Sykes agrees that Sykes will pay or cause to be paid any
broker, finder or agent that has acted on Sykes' behalf with respect to the
transactions provided in the Party Agreements, and agrees to indemnify and hold
nStor harmless in the event of any loss, claim, demand or expense asserted
against or incurred by nStor relating to the payment of any fees or commissions
by any such broker, finder or agent acting on behalf of Sykes.
(l) Modifications. This Agreement may not be altered, modified or
amended except by a writing signed by the Parties.
(m) Further Assurances. The Parties agree to execute and deliver, or
cause to be executed and delivered, such further instruments or documents and
take such other action as may be reasonably required effectively to carry out
the transactions contemplated herein.
IN WITNESS WHEREOF, the Parties have duly executed this Agreement as of
the date first above written.
nStor Technologies, Inc.
13
<PAGE>
By:__________________________
Name:________________________
Title:_______________________
/s/ W. David Sykes
-----------------------------
W. David Sykes, individually
Sykes Children's Trust of 1993
By:__________________________
__________________, Trustee
14
AMENDMENT NO. 1 TO
------------------
PURCHASE AGREEMENT
------------------
This AMENDMENT NO. 1 TO PURCHASE AGREEMENT (the "Agreement") is entered
into as of the 26th day of April, 1999 by and between nSTOR TECHNOLOGIES, INC.,
a Delaware corporation ("nStor"), and W. DAVID SYKES, an individual ("D.
Sykes"), the SYKES FAMILY TRUST and the SYKES CHILDREN'S TRUST OF 1993 dated
November 22, 1993 (collectively, the "Trusts"). D. Sykes and the Trusts are
referred to herein together as "Sykes," and Sykes, D. Sykes, the Trusts and
nStor are sometimes referred to herein individually as a "Party," and together
as the "Parties".
RECITALS
Sykes is collectively the owner of 18,021,281 shares of the common
stock (the "Shares") of Andataco, Inc., a Massachusetts corporation
("Andataco"), and D. Sykes is the owner of a certain promissory note of Andataco
owned by and payable to D. Sykes in the face amount of $5,196,000 (the "Note").
On March 2, 1999, nStor, Sykes and the Trusts entered into an agreement
for the sale of the Shares and the Note to nStor (the "Agreement").
Sykes wishes to sell the Shares and D. Sykes wishes to sell the Note to
nStor and D. Sykes wishes to enter into an employment agreement with nStor, and
nStor wishes to purchase the Shares and the Note from Sykes and D. Sykes and
enter into an employment agreement with D. Sykes, all upon the terms and subject
to the conditions provided in the Agreement, as amended by this Amendment No. 1.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants and agreements
and the payment of valuable consideration as provided herein, and intending to
be legally bound, the Parties agree as follows:
1. Purchase of the Shares by nStor
Sykes agrees to sell, assign, transfer and convey the Shares to nStor,
and nStor agrees to purchase the Shares from Sykes, for a purchase price of
$3,500,000 (the "Stock Purchase Price"), payable on the Closing (as hereinafter
defined) by delivery to the Trusts and D. Sykes, in proportion to their
ownership of the Shares, of three subordinated, convertible promissory notes of
nStor in the form attached hereto as EXHIBIT A (the "Convertible Notes") in the
aggregate principal amount of $3,500,000, subject to the terms and conditions of
this Agreement. Of the total $3,500,000 aggregate principal amount of the
Convertible Notes, $3,000,000 will be convertible into common stock of nStor.
1
<PAGE>
2. Purchase of the Note by nStor
(a) D. Sykes agrees to sell, assign, transfer and convey the Note to
nStor, and nStor agrees to purchase the Note from D. Sykes, for a cash purchase
price of $3,500,000 and a subordinated promissory note of nStor in the form
attached hereto as EXHIBIT B (the "Subordinated Note") in the principal amount
of $1,500,000 (collectively, the "Note Purchase Price"), payable on the Closing
by wire transfer or certified check and the delivery of the Subordinated Note,
subject to the terms and conditions of this Agreement. D. Sykes agrees to accept
the Note Purchase Price in full payment for the assignment, transfer and
conveyance of the Note and full payment and satisfaction of any and all other
indebtedness, obligations and liabilities of Andataco to D. Sykes, whether due,
accrued or contingent, including, without limitation, payments by Andataco to D.
Sykes for retirement benefits (collectively, the "Indebtedness"). Nothing in
this Section 2(a) shall affect in any manner any vested rights of D. Sykes in
any Andataco retirement plans and D. Sykes shall be entitled to control all
investments in such Andataco retirement plans.
(b) The Indebtedness shall not include the Convertible Notes or the
Subordinated Note, the Employment Agreement between D. Sykes and Andataco dated
as of May 1, 1997 (the "Andataco Employment Agreement"), the Noncompetition
Agreement between Andataco and D. Sykes dated as of June 3, 1997 (the
"Noncompetition Agreement"), or any participation by Andataco in the Employment
Agreement described in Section 3 hereof. If requested by nStor or Andataco, at
any time on or after the Closing Date (as hereinafter defined), D. Sykes shall
execute and deliver to Andataco an unconditional general release and all
original instruments evidencing the Indebtedness marked "paid in full," subject
only to the exceptions provided in the immediately preceding sentence, and D.
Sykes shall execute and deliver such other agreements, instruments and documents
as counsel to nStor or Andataco may reasonably request to further evidence the
payment, discharge and satisfaction of the Indebtedness. In the event that nStor
or any of its subsidiaries or affiliates acquires all outstanding shares of
voting stock of Andataco in addition to the Shares, D. Sykes shall immediately
enter into a written agreement with Andataco terminating, and execute and
deliver to Andataco an unconditional general release as to, the Noncompetition
Agreement. Nothing contained in this Section 2 shall affect in any manner the
right of D. Sykes, as an officer and director of Andataco, to indemnification by
Andataco as presently provided or to coverage under the current Andataco
director and officer insurance policy.
3. Employment of D. Sykes.
(a) Sykes and nStor's wholly owned subsidiary, nStor Corporation (the
"Company") shall enter into an employment agreement in the form attached hereto
as EXHIBIT C (the "Employment Agreement"), effective on the date on which nStor
or any of its subsidiaries or affiliates acquires all outstanding voting stock
of Andataco in addition to the Shares. nStor shall cause the Company to execute
and deliver the Employment Agreement. The Employment Agreement shall be executed
on the Closing Date by D. Sykes and the Company and delivered to counsel for
nStor and D. Sykes to jointly hold in escrow on behalf
2
<PAGE>
of nStor and D. Sykes, respectively, and to date and deliver to D. Sykes and the
Company upon the occurrence of the condition set forth in the first sentence of
this Section 3(a).
(b) D. Sykes shall also continue to be employed by Andataco in his
present capacity pursuant to the Andataco Employment Agreement as provided in
Section 1(b) of the Employment Agreement. In addition, so long as the Andataco
Board of Directors determines that it does not constitute a breach of the
Noncompetition Agreement, D. Sykes agrees that, commencing on the Closing Date
and during the time that he continues to be employed by Andataco before the
Employment Agreement is executed and delivered, he will perform services for the
Company on a "loaned executive" basis, substantially the same as his
responsibilities and duties as described in the Employment Agreement and in
consideration of the "Compensation" as defined and provided in Section 1(b)(ii)
of the Employment Agreement; provided, however, that (a) in the event Sykes
receives total compensation from the Company and Andataco in excess of the
Compensation payable to Sykes during such period of time (including, without
limitation, payments under the Noncompetition Agreement prior to its termination
as provided in Section 2 hereof), such excess shall be repaid by deductions from
any bonus compensation due D. Sykes for the period ended December 31, 1999
pursuant to Section 3(b) of the Employment Agreement; provided further, however,
that if the excess exceeds the bonus compensation payable for that period, it
shall not carryover in the next bonus period and D. Sykes shall keep such
excess, and (b) the grant of the Option pursuant to Section 4 of the Employment
Agreement shall be retroactive to the Closing Date. Further, D. Sykes agrees to
enter into an Amended and Restated Andataco Employment Agreement as provided in
Section 1(b)(iii) of the Employment Agreement.
4. Agreement Not to Compete
D. Sykes recognizes that (i) Andataco has spent substantial money, time
and effort in developing and solidifying its relationships with its suppliers
and customers, (ii) long-term supplier and customer relationships often can be
difficult to develop, (iii) Andataco paid and pays its employees to, among other
things, develop and preserve business information, supplier and customer
goodwill, loyalty and contacts for and on behalf of Andataco, and (iv) nStor is
hereby agreeing to purchase the Shares from Sykes based upon D. Sykes'
assurances and promises contained herein not to take or divert Andataco's
suppliers' and customers' goodwill, including such suppliers' and customer's
goodwill as part of the combined businesses of Andataco and the Company as
contemplated by this Agreement and the Employment Agreement (for the purpose of
this Section 4, all references to the Company shall be deemed to be references
to the Company and Andataco). Accordingly, D. Sykes covenants and agrees that
for lesser of a period of three years following the Closing Date or a period of
one year following the termination for any reason of his employment by the
Company (or any successor to the business of the Company), he will not, directly
or indirectly:
(a) engage, either as principal, agent or consultant, or through any
corporation, firm, organization or other entity (a "Competitive Entity") in
which he may be an officer, director, employee, stockholder, partner, member, or
with which he is otherwise affiliated, in any activity or business that is in
competition with the business of the Company in any
3
<PAGE>
geographic area in the United States or in any other country where the Company
is doing business;
(b) on behalf of any Competitive Entity, solicit, call on, or in any
manner cause or attempt to cause or provide any Confidential Information (as
defined in the Employment Agreement) to any customer or active prospective
customer of the Company, or divert, terminate, limit, modify or fail to enter
into any existing or potential relationship between the Company and any customer
or active prospective customer of the Company; or
(c) induce or attempt to induce any employee, consultant or advisor of
the Company to accept employment or an affiliation with any Competitive Entity.
D. Sykes agrees that if he violates any of the provisions of this Section 4, the
Company would sustain irreparable harm and, therefore, in addition to any other
remedies that might be available to it, the Company shall be entitled to an
injunction restraining D. Sykes from committing or continuing any such violation
without the requirement to post a bond or other security. The Company and D.
Sykes agree that in the event any of the provisions of this Section 4 shall be
held to be in any way an unreasonable restriction on D. Sykes, the court so
holding may reduce the geographical area and/or period of time in which such
provision operates, or modify or eliminate any such restriction to the extent
necessary to render such provisions enforceable. Nothing in this Section 4 shall
be deemed to negate or limit in any manner the covenants and agreements of D.
Sykes pursuant to Section 6 of the Employment Agreement, but shall be in
addition thereto.
5. Representations and Warranties of Sykes
In order to induce nStor into entering into this Agreement and to
purchase the Shares and the Note, Sykes hereby represent and warrant to nStor,
which representations and warranties shall remain true and correct on the
Closing Date, and covenant and agree with nStor, as follows:
(a) Sykes is, and on the Closing Date will be, the owner of the Shares,
free and clear of any and all liens, claims, encumbrances and restrictions, and
the Shares may be sold, assigned, transferred and conveyed to nStor without the
requirement of any consent or approval by Andataco or any other party,
including, without limitation, the consent or approval of any party whose
failure to give such consent or approval would have an adverse effect on
Andataco, other than consents or approvals that shall be obtained by Sykes and
delivered to nStor on or before the Closing.
(b) The Note is assignable by D. Sykes to nStor without the requirement
of any consent or approval by Andataco or any other party, and upon the purchase
of the Note by nStor shall be the valid and binding obligation of Andataco and
enforceable by nStor in accordance with its terms in the same manner as if owned
by D. Sykes.
(c) When executed and delivered by Sykes, this Agreement will
constitute a valid and legally binding obligation of Sykes enforceable in
accordance with its terms, except as may
4
<PAGE>
be limited by (i) judicial principles respecting election of remedies or
limiting the availability of specific performance, injunctive relief and other
equitable remedies, (ii) judicial principles with respect to provisions contrary
to public policy, and (iii) bankruptcy, insolvency, reorganization, moratorium
or other similar laws, now or hereafter in effect, generally relating to
creditors' rights.
(d) To Sykes' knowledge, Andataco is duly organized, validly existing
and in good standing under the laws of the Commonwealth of Massachusetts and is
qualified to do business and in good standing in each other jurisdiction where
the business of Andataco requires it to be so qualified, including, without
limitation, the State of California. To Sykes' knowledge, Andataco has all
requisite corporate power and authority to own its assets and to carry on its
business as presently conducted in each jurisdiction where such assets is
located and such business is conducted.
(e) Attached hereto as EXHIBIT D is a copy of Andataco's Form 10-K for
the fiscal year ended October 31, 1998 (the "1998 10-K") and its Form 10-Q for
the quarter ended January 31, 1999. The 1998 10-K does not contain any untrue
statement of a material fact or omit to state any material fact necessary in
order to make each statement contained therein not misleading. From and after
January 31, 1999, to D. Sykes' knowledge, no events have occurred or are
threatened that would materially affect the financial condition, assets or
business of Andataco.
(f) As of the date of this Agreement, Andataco's only authorized
capital stock consists of the common and preferred stock as described in the
1998 10-K, and there are no issued shares of any class of voting stock of
Andataco other than the class of which the Shares are a part. Of the authorized
common stock, 23,819,399 shares are issued and outstanding and of these
18,021,281 shares are owned by Sykes and constitute the Shares. The Shares
constitute the only common stock of Andataco in which Sykes has a direct or
beneficial interest. The 1998 10-K accurately and fairly describes Andataco's
1997 Equity Incentive Plan, as amended (the "Plan"). The Plan, the Andataco 1996
Stock Option Plan, the Andataco 1993/1991 Stock Option Plan, the Andataco
Director Stock Option Plan and the 180,000 warrants issued to Imperial Bank, are
the only plans, agreements or commitments of Andataco to issue additional
authorized capital stock.
(g) Sykes shall not, between the date hereof and the Closing Date,
accept from Andataco any compensation or other payments or benefits from
Andataco, including, without limitation, accrued but unpaid compensation, other
than compensation for services on a current basis.
(h) Sykes shall, between the date hereof and the Closing Date: (i)
cause the business of Andataco to be conducted in the ordinary course, (ii) not
cause Andataco to have any material change in its business, financial condition
or assets, (iii) not cause, by request to the Andataco Board of Directors or
otherwise, Andataco to grant any options or other rights to acquire any capital
stock of Andataco, or issue any capital stock of Andataco to any person, or
enter into any employment agreements with any persons.
5
<PAGE>
6. Representations and Warranties of nStor
In order to induce Sykes to enter into this Agreement and to sell the
Shares and the Note, nStor represents and warrants to Sykes as of the date
hereof, and as of the Closing Date, and covenants and agrees with Sykes, as
follows:
(a) nStor is a corporation duly organized, validly existing and in good
standing within the laws of the State of Delaware and has all requisite and
corporate authority to carry on business as it is now carried on and conducted.
When executed and delivered by nStor, this Agreement will constitute a valid and
legally binding obligation of nStor enforceable in accordance with its terms,
except as may be limited by (i) judicial principles respecting election of
remedies or limiting the availability of specific performance, injunctive relief
and other equitable remedies, (ii) judicial principles with respect to
provisions contrary to public policy, and (iii) bankruptcy, insolvency,
reorganization, moratorium or other similar laws, now or hereafter in effect,
generally relating to creditors' rights.
(b) nStor expressly represents and warrants as of the Closing Date
that: (i) it is acquiring the Shares and the Note for investment purposes only,
for its own account, and not with the view to, or for resale in connection with,
any distribution thereof, (ii) it has such knowledge and experience in financial
and business matters that it is capable of evaluating the merits and risks of
this investment and is able to bear the economic risk of this investment, (iii)
its purchase of the Shares and the Note has not been accompanied by the
publication of any advertisement, (iv) its purchase of the Shares and the Note
has not been effected by or through a broker-dealer in a public offering. On the
Closing Date, nStor will separately represent and warrant in writing to Sykes,
if then true, that: (v) it has had the opportunity to ask questions of the
directors, officers and employees of Andataco and has obtained and carefully
reviewed and considered all the information regarding Andataco that nSTOR
considers necessary or appropriate to decide whether to purchase the Shares and
the Note, and (vi) Sykes and Andataco have provided nSTOR with access to all
financial information, records, documents, contracts, agreements, court filings,
case records and ledgers relating to Andataco.
(c) nStor (i) has adequate means of providing for its current needs and
possible contingencies, and has no need now, and anticipates no need in the
foreseeable future, to sell the Shares or the Note which it is hereby purchasing
and (ii) is able to bear the economic risks of this investment, and,
consequently, without limiting the generality of the foregoing, is able to hold
its Shares and the Note indefinitely and has a sufficient net worth to sustain a
loss of its entire investment in Andataco in the event such loss should occur.
(d) nStor acknowledges and agrees that neither the Shares nor the Note
have been registered under the Securities Act of 1933, as amended (the "Act") or
under the California Corporate Securities Law of 1968, as amended (the
"California Law") or other applicable law, and that accordingly the Shares and
the Note will not be fully transferable except as permitted under various
exemptions contained in the Act, California Law or other applicable state law,
or upon satisfaction of the registration requirements of the Act, the
qualification requirements of California Law or other applicable state law, or
the registration requirements of other applicable state securities laws. nStor
hereby acknowledges and agrees that the certificates
6
<PAGE>
representing the Shares and the Note will bear any legends required under the
Act, California Law or other applicable state law.
(e) If nStor acquires the common stock of Andataco held by shareholders
other than Sykes, it will do so for consideration no less than the greater of
the price per share received by Sykes for the Shares or the fair market value of
such stock valued as of the day immediately prior to the date of execution of
this Agreement as stated in an opinion obtained prior to such acquisition from a
recognized investment banking firm. nStor agrees that the shareholders of
Andataco other than Sykes shall be given and advised of their "dissenter's"
rights, as provided under Massachusetts law and all other applicable law, in
connection with any acquisition by nStor of their shares of Andataco stock.
(f) nStor acknowledges that the Shares are subject to the terms and
conditions of that certain Lock-Up Agreement, dated June 3, 1997, a copy of
which is attached hereto as EXHIBIT E and that, upon the purchase of the Shares,
it will be bound by the terms and conditions of that Agreement.
7. Financing; Standstill; Confidentiality; Disclosure
(a) nStor agrees to use its best efforts to obtain the financing
necessary to consummate the transactions contemplated by this Agreement (the
"nStor Financing") on or before May 17, 1999.
(b) Sykes hereby agrees not to solicit or accept offers from, or
negotiate for or enter into any agreements with, any other parties for any of
the transactions or agreements contemplated by this Agreement during the period
ending June 9, 1999.
(c) The existence and contents of this Agreement, the existence of
negotiations between the Parties and all documents and information obtained by
either Party from the other Party, regardless of identifying mark or label and
whether written, oral or in electronic form, shall remain strictly confidential
(the "Confidential Information"), and neither of the Parties shall reveal any of
the Confidential Information or provide any copies of any documents or other
materials relating to the Confidential Information to any person, corporation or
other entity, other than the Board of Directors and senior officers of and the
attorneys and financial advisors for Andataco, without the prior written consent
of the providing Party.
(d) The Parties understand that the transactions contemplated herein
will require, pursuant to applicable securities and other laws, a public
announcement by nStor upon the receipt of a firm commitment for the nStor
Financing. Such a press release, describing all of the relevant terms and
conditions of the transactions contemplated by this Agreement, may be issued by
nStor upon the receipt of such a commitment. Sykes also acknowledges that nStor
will be required to file a Schedule 13D pursuant to Rule 13d-1 of the Securities
Exchange Act of 1934 upon obtaining the nStor Financing. In addition, attached
hereto as EXHIBIT F is a press release prepared by the Parties for publication
upon a termination of this Agreement and the transactions contemplated hereby.
This press release shall be issued by nStor immediately upon termination of this
Agreement according to its terms. The Parties agree that no deviation
7
<PAGE>
shall be made from such press release unless mutually agreed by the Parties. The
Parties agree that no other public disclosure shall be made by the Parties until
the Closing except upon the mutual consent of the Parties, unless counsel to
nStor advises nStor that it is legally required to make such disclosure or to
respond to requests for such disclosure and in either such event the Parties
agree to use their reasonable best efforts to mutually agree upon the wording of
such disclosure. Nothing in any public disclosure, shall be deemed in any way to
modify or limit in any way the provisions of Section 7(c).
(e) nStor shall maintain Andataco's current director and officer
insurance policy or equivalent for a period of two years after the Closing.
nStor shall not alter the current indemnification rights of Andataco officers
and directors until the sooner of (i) two years after the Closing or (ii) the
termination of the separate existence of Andataco.
8. Lease Guaranty
At the Closing, nStor agrees to execute a written guaranty, in form and
substance as nStor may reasonably agree, of Andataco's performance under the
real property lease between Syko Properties, Inc., a corporation owned and/or
controlled by D. Sykes, as lessor, and Andataco, as lessee, dated as of January
1, 1993, as amended, pursuant to which Andataco leases the premises in which it
conduct business in San Diego, California (the "Lease"); provided, however, that
nStor's obligation under this Section 8 is conditioned upon the Lease being
terminable by Andataco in its sole discretion at any time upon nine months
notice to the lessor.
9. Closing
The closing and consummation of all transactions provided in this
Agreement (the "Closing") shall take place at 10:00 A.M. on May 17, 1999 (the
"Closing Date"), at the offices of Akerman, Senterfitt & Eidson, P.A., counsel
to nStor, 450 East Las Olas Boulevard, Suite 950, Fort Lauderdale, Florida
33301, or on such other day and at such other time and place as the Parties may
mutually agree. In the event that the completion of the nStor Financing requires
the approval of the stockholders of nStor, the closing shall be extended to June
9, 1999, the day following the nStor 1999 Annual Meeting of Stockholders.
10. Deposits
(a) Upon the signing of this Agreement, nStor will pay to Sykes a
non-refundable deposit of $100,000, by wire transfer or certified check. In the
event that the Closing takes places as contemplated by Section 9 hereof, the
$100,000 deposit will be credited against the Note Purchase Price.
(b) Upon the receipt by nStor of a firm commitment for the nStor
Financing in an amount not less than $7,500,000, nStor will pay to Sykes an
additional non-refundable deposit of $50,000, by wire transfer or certified
check. In the event that the Closing takes places as contemplated by Section 9
hereof, the additional $50,000 deposit will be credited against the Note
Purchase Price.
8
<PAGE>
(c) In the event that the Closing Date is extended to June 9, 1999, on
May 17, 1999 nStor will pay to Sykes an additional non-refundable deposit of
$50,000, by wire transfer or certified check. In the event that the Closing
takes places as contemplated by Section 9 hereof, the additional $50,000 deposit
will be credited against the Note Purchase Price.
11. Termination
nStor may terminate this Agreement for any reason in its sole and
absolute discretion at any time prior to the Closing Date upon notice to Sykes
that it has not obtained the nStor Financing and does not wish to proceed with
the transactions contemplated by this Agreement. Upon any such termination, the
Parties shall have no further obligations under this Agreement, except that the
obligations of the Parties under Section 4(c), Section 10 and Section 12 shall
survive such termination. If the Closing has not occurred on or before June 9,
1999, either party may terminate this Agreement. Upon any termination of this
Agreement for any reason other than Sykes' material breach or default under this
Agreement, failure or inability to complete the transactions contemplated
hereby, or the material failure of any of the conditions precedent set forth in
Sections 14(a)(i)-(iii) or 14(a)(v)-(viii), Sykes shall be entitled to retain
all deposits paid pursuant to Section 10 hereof and reimbursement of expenses as
provided in Section 12 hereof.
12. Expenses
Each Party shall bear its and his own expenses, including legal and
accounting fees and costs, in connection with this Agreement and the Closing;
provided, however, that: (a) if the Closing occurs, nStor shall reimburse Sykes
for documented attorney, accountant and investment banking fees and expenses up
to the amount of $465,000, (b) if the Closing does not occur for any reason,
nStor shall reimburse Sykes for documented attorney and accountant fees and
expenses up to the amount of $20,000, (c) if the Closing does not occur through
no fault of Sykes, nStor shall reimburse Sykes for documented attorney and
accountant fees and expenses up to the additional amount of $35,000, and (d) if
the Closing does not occur as a result of Sykes willfully and knowingly
breaching any of his representations and warranties in Section 5 hereof, Sykes
shall indemnify and hold harmless, and immediately reimburse, nStor for its
costs and expenses, including reasonable attorney's and accountant's fees and
expenses, incurred in the conduct of its due diligence in connection with this
Agreement and in preparing for the Closing.
13. Indemnification
(a) Indemnification by nStor. nStor shall indemnify, defend and hold
harmless Sykes against any and all damages, losses, claims, liabilities,
charges, suits, penalties, costs and expenses, including court costs, attorneys'
fees and expenses and other costs of collection (collectively "Loss" or
"Losses"), which Sykes personally may sustain, or to which he may be subjected,
arising out of or attributable to: (i) the failure of nStor to consummate the
acquisition of the Shares and the Note for other than nStor's right to terminate
pursuant to Section 11 hereof; (ii) the failure of nStor or its officers,
directors, shareholders, affiliates,
9
<PAGE>
employees or agents to treat the minority shareholders of Andataco, Inc. fairly
or properly after the Closing; or (iii) any actions brought against Sykes by
third parties as a result of the consummation of the transactions contemplated
hereby.
(b) Notice and Resolution of Indemnity Claims. If at any time Sykes
shall claim indemnification from nStor for any Loss or, in the reasonable
judgment of Sykes, for what, in the future, may result in a Loss ("Anticipated
Loss") due to the filing, at or before the time of such claim, of an action,
claim or suit with an arbitrator, mediator, court or other governmental entity
("Claim"), then Sykes shall send written notice of the same (a "Notice of
Claim") to nStor. A Notice of Claim shall specify the basis for such Claim
supported by relevant information and documentation.
(i) If nStor shall object to such Claim, it shall give written
notice of such objection (a "Notice of Objection") to Sykes within 15
days after receipt by nStor of the Notice of Claim, specifying the
basis of the objections supported by relevant information and
documentation with respect thereto. If nStor does not give a Notice of
Objection within such 15 days, or shall have agreed to pay such Claim
in whole or in part within such 15-day period, nStor shall thereupon be
liable for the payment of such Claim.
(ii) In the event that nStor shall have timely given a Notice
of Objection in whole or in part to any Notice of Claim, during the
20-day period following that date, nStor and Sykes shall privately
attempt to resolve the Claim. If nStor and Sykes shall have failed to
resolve or compromise or agree to postpone resolution of the Claim
within the 20--day period, then the Claim shall be settled by
arbitration in San Diego, California, as determined by the three
arbitrators referred to in Section 13(b)(iii) below, in accordance with
the rules of the American Arbitration Association and the procedures
set forth below.
(iii) Each of (A) Sykes and (B) nStor shall appoint one
arbitrator, and the two arbitrators so appointed shall then together
appoint a third arbitrator ("neutral arbitrator") from a list of
persons supplied by the American Arbitration Association in San Diego,
California. If one party shall fail to appoint the arbitrator to be
appointed by it within 15 days of the end of the 20-day period provided
for in Section 13(b)(ii) above, the arbitrator appointed by the other
party shall select from a list of persons supplied by the American
Arbitration Association a person who shall serve as the single neutral
arbitrator for purposes of the arbitration. If each party shall have
appointed one arbitrator, but such designees cannot agree on the person
to act as the neutral arbitrator within a period of 15 days after the
appointment of the second arbitrator, then either party may apply to
the American Arbitration Association in San Diego, California, which
shall appoint a neutral arbitrator. As used hereafter the term
"arbitrator" shall include the singular and the plural as applicable.
The arbitrator shall conduct the arbitration with all reasonable
dispatch in accordance with the rules of the American Arbitration
Association, provided, however, that the parties to such arbitration
shall take such action and execute such instruments as shall be
necessary to cause the California Rules of Civil Procedure pertaining
to pre-trial discovery to be applicable in
10
<PAGE>
respect of such proceeding. The arbitrator shall render a written
award (the "Award") which shall be delivered to Sykes and nStor. An
Award hereunder may be used as a basis for the entry of judgment in any
jurisdiction. In the event the parties have submitted a Claim for an
Anticipated Loss to arbitration under this Section 13(b)(iii), then the
arbitrator may, in its sole discretion, postpone resolution of the
Claim until the time which it has determined, in its sole discretion,
to be the time when such Anticipated Loss shall have occurred or passed
has been reached.
(iv) Prior to making the Award, the arbitrator shall direct
Sykes and nStor to submit statements describing any element of Loss or
Anticipated Loss as to which a Claim is made that is attributable to
attorneys' fees, disbursements, and any similar costs incident to such
Loss or Anticipated Loss, supported by affidavits showing that such
costs actually have been or are likely to be incurred, and all such
attorneys' fees, disbursements and other costs shall be apportioned as
determined by the arbitrator. All fees of the arbitrator and
administrative expenses of the American Arbitration Association shall
be treated as costs for purposes of this Article. As a part of each
Award made pursuant to this Agreement, the arbitrator shall allow
interest thereon (other than on the portion of the Award representing
attorneys' fees, disbursements and costs) from the date of the Loss or
the date the Anticipated Loss becomes a Loss to the date of payment at
the rate of 10% per annum.
(v) The Award shall be a conclusive determination of the matter
and shall be binding upon Sykes and nStor, and shall not be contested
by either of them. nStor shall satisfy its obligations to pay an Award
in cash.
(vi) If a the subject of a Claim involves a third-party claim
which has not yet been determined, the arbitrator may in his discretion
make a separate determination solely as to whether the third-party
claim is one for which indemnification may be had or may defer a
determination as to whether indemnification may be had pending the
further development of information as to the nature of the third-party
claim. If the arbitrator determines that the third-party claim is not
subject to indemnification, he shall set forth the basis of his
decision in detail, which decision shall be deemed to be an "Award"
hereunder.
11
<PAGE>
(vii) Promptly after the assertion by any third party of any
claim against Sykes that, in the judgment of Sykes, may result in the
incurrence by Sykes of Loss for which Sykes would be entitled to
indemnification, Sykes shall deliver to nStor a Notice of Anticipated
Loss describing in reasonable detail such Claim. If Sykes request nStor
defend him against such Claim, then nStor may, at its option, assume
the defense of Sykes against such Claim (including the employment of
counsel, who shall be counsel satisfactory to Sykes,) and the payment
of expenses. If Sykes does not request nStor to defend him against such
Claim or nStor fails to assume the defense of such Claim within a
reasonable time after having been requested by Sykes to assume the
defense, then Sykes shall have the right to defend himself in any such
action and, if appropriate under Section 13(a) above, be indemnified
for his costs and fees of defense by nStor. nStor shall not be liable
to indemnify Sykes for any settlement of any such action or claim
effected without the consent of nStor, but if settled with the written
consent of nStor, or if there be a final judgment for the plaintiff in
any such action, nStor shall indemnify and hold harmless Sykes from and
against any Loss by reason of such settlement or judgment and nStor
shall thereupon be liable for the payment of such Loss.
14. Conditions to Closing
(a) nStor's obligation to consummate the transactions contemplated by
this Agreement shall be subject to the fulfillment, at or prior to Closing, of
each of the following conditions precedent (any or all of which may be waived in
writing, in whole or in part, by nStor):
(i) Sykes shall have performed all of the obligations and
complied with all of the covenants required to be performed or to be
complied with by them under this Agreement on or prior to the Closing
Date.
(ii) Sykes shall have delivered to nStor any and all
approvals, consents or assignments to be obtained by Sykes and
necessary for the consummation of the transactions contemplated hereby.
(iii) nStor and its accountants, attorneys and other
representatives shall have had full and complete access during normal
business hours to all offices, facilities, properties, assets, books,
agreements, files and records of Andataco, including financial and
operating data and other information regarding Sykes and Andataco.
(iv) nStor shall have received the nStor Financing on or prior
to the Closing Date.
(v) There shall not have been instituted, pending or
threatened against Andataco, Sykes, nStor or the Company any suit,
action or other proceeding by any private party or governmental agency,
commission, bureau or body seeking to restrain or prohibit any of the
transactions contemplated by this Agreement.
(vi) D. Sykes shall have entered into Employment Agreement as
provided for in Section 3(a) hereof.
(vii) Each representation and warranty of Sykes contained in
this Agreement shall be true and correct both at the date on which this
Agreement is signed and at and as of the Closing Date as if made anew
at and as of such time.
(viii) There has not been any material adverse change in the
business, operations and financial conditions of Andataco from and
after the date of the 1998 10-K until the Closing Date.
12
<PAGE>
(b) The obligations of Sykes to consummate the transactions
contemplated by this Agreement shall be subject to the fulfillment, at or prior
to Closing, of each of the following conditions precedent (any or all of which
may be waived in writing, in whole or in part, by Sykes):
(i) nStor shall have performed all of its obligations and
complied with all of its covenants required to be performed or to be
complied with by it under this Agreement on or prior to the Closing
Date.
(ii) nStor shall have delivered to Sykes any and all
approvals, consents or assignments to be obtained by nStor and
necessary for the consummation of the transactions contemplated hereby.
(iii) There shall not have been instituted, pending or
threatened against Andataco, Sykes, nStor or the Company any suit,
action or other proceeding by any private party or governmental agency,
commission, bureau or body seeking to restrain or prohibit any of the
transactions contemplated by this Agreement.
(iii) The Company shall have entered into Employment Agreement
as provided for in Section 3(a) hereof.
(iv) Each representation and warranty of nStor contained in
this Agreement shall be true and correct both at the date on which this
Agreement is signed and at and as of the Closing Date as if made at and
as of such time.
15. Miscellaneous
(a) Entire Agreement. This Agreement and the Employment Agreement, when
executed (collectively, the "Party Agreements"), constitute the complete and
exclusive statement of the agreement between the Parties with respect to the
subject matter of the Party Agreements. The Party Agreements replace and
supersede all prior agreements and negotiations by and between the Parties and
each of the Parties acknowledges and agrees that no agreements, representations,
warranties or collateral promises or inducements have been made by or to it or
him except as expressly set forth in the Party Agreements. These acknowledgments
and agreements are contractual and not mere recitals.
(b) Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the Parties and their respective successors and
permitted assigns and Sykes' personal representatives, executors, administrators
and beneficiaries; provided, however, that neither Party shall assign this
Agreement or any of its or his rights or obligations hereunder without the prior
written consent of the other Party, which consent may be withheld or delayed in
the sole discretion of Party whose consent is requested.
(c) No Third Party Beneficiary. Nothing expressed or implied in this
Agreement is intended, or shall be construed, to confer upon or give any person,
firm, corporation, partnership, association or other entity, other than the
Parties and their respective successors and
13
<PAGE>
permitted assigns, any rights or remedies under or by reason of this Agreement,
except that Andataco shall be a third party beneficiary and entitled to enforce
in its own name the provisions of the second and third sentences of Section
2(b).
(d) Survivability. Notwithstanding any investigation made by or on
behalf of either Party, the representations and warranties made under and in
connection with this Agreement shall survive the Closing and consummation of all
the transactions contemplated hereby for a period of one year.
(e) Waivers and Remedies. The waiver by either of the Parties of the
other Party's prompt and complete performance, or breach or violation, of any
provision of this Agreement shall not operate nor be construed as a waiver of
any subsequent breach or violation, and the waiver by either of the Parties to
exercise any right or remedy which it may possess hereunder shall not operate
nor be construed as a bar to the exercise of such right or remedy by such Party
upon the occurrence of any subsequent breach or violation.
(f) Severability. The invalidity of any one or more of the words,
phrases, sentences, clauses, sections or subsections contained in this Agreement
shall not affect the enforceability of the remaining portions of this Agreement
or any part hereof, all of which are inserted conditionally on their being valid
in law, and, in the event that any one or more of the words, phrases, sentences,
clauses, sections or subsections contained in this Agreement shall be declared
invalid by a court of competent jurisdiction, this Agreement shall be construed
as if such invalid word or words, phrase or phrases, sentence or sentences,
clause or clauses, section or sections, or subsection or subsections had not
been inserted.
(g) Descriptive Headings/Recitals. Descriptive headings contained
herein are for convenience only and shall not control or affect the meaning or
construction of any provision of this Agreement. The Recitals are incorporated
into and made a part of this Agreement.
(h) Counterparts and Facsimile Signatures. This Agreement may be
executed in counterparts by the separate Parties, all of which shall be deemed
to be one and the same instrument. Facsimile signatures shall have the same
effect as original signatures.
(i) Notices. Any notice, request or other communication to either Party
by the other hereunder shall be deemed given on the earlier of the date (i)
actually received and acknowledged; (ii) three (3) days after its mailing by
certified or registered mail, return receipt requested, postage prepaid; or,
(iii) on the business day immediately following its delivery (evidenced by
receipt) to any reputable overnight carrier or transmission via facsimile in
each case addressed to the Party for which it is intended at the address (or
facsimile transmission number) set forth in this Agreement. The place to which
notices are to be given to any Party may be changed from time to time by such
Party by like notice to the other. Notices shall be addressed as follows:
14
<PAGE>
If to nStor:
------------
H. Irwin Levy, Chairman
nStor Technologies, Inc.
100 Century Boulevard
West Palm Beach, FL 33417
Fax: (561) 640-3160
and
Lawrence Steffann, President
nStor Technologies, Inc.
450 Technology Park Boulevard
Lake Mary, FL 32746
Fax: (407) 829-3627
With a copy to:
Akerman Senterfitt & Eidson, P.A.
450 East Las Olas Boulevard
Suite 950
Fort Lauderdale, FL 33301
Attn: Donn Beloff, Esq.
Fax: (954) 463-2224
If to Sykes:
------------
W. David Sykes
C/o Andataco, Inc.
10140 Mesa Rim Road
San Diego, CA 92121
Fax: (619) 453-2676
With a copy to:
Luce, Forward, Hamilton & Scripps LLP
600 West Broadway, Suite 2600
San Diego, California 92101
Attn: Dennis J. Doucette, Esq.
Fax: (619) 232-8311
(j) Applicable Law. This Agreement shall be governed by, and shall be
construed, interpreted and enforced in accordance with, the laws of the State of
Florida, without regard to principles of conflict of laws.
15
<PAGE>
(k) Brokers and Agents. nStor represents to Sykes that no broker,
finder or agent has acted on behalf of nStor with respect to the transactions
provided in the Party Agreements, and agrees to indemnify and hold Sykes
harmless in the event of any loss, claim, demand or expense asserted against or
incurred by Sykes relating to the payment of any fees or commissions by any such
broker, finder or agent acting on behalf of nStor. Other than as provided in
Section 12(a) hereof, Sykes agrees that Sykes will pay or cause to be paid any
broker, finder or agent that has acted on Sykes' behalf with respect to the
transactions provided in the Party Agreements, and agrees to indemnify and hold
nStor harmless in the event of any loss, claim, demand or expense asserted
against or incurred by nStor relating to the payment of any fees or commissions
by any such broker, finder or agent acting on behalf of Sykes.
(l) Modifications. This Agreement may not be altered, modified or
amended except by a writing signed by the Parties.
(m) Further Assurances. The Parties agree to execute and deliver, or
cause to be executed and delivered, such further instruments or documents and
take such other action as may be reasonably required effectively to carry out
the transactions contemplated herein.
IN WITNESS WHEREOF, the Parties have duly executed this Agreement as of
the date first above written.
nStor Technologies, Inc.
By: /s/ Mark Levy
----------------------------
Name: Mark Levy
--------------------------
Title: Vice President
----------------------------
/s/ W. David Sykes
-----------------------------
W. David Sykes, individually
Sykes Children's Trust of 1993
By:/s/ James Harlan, III
------------------------------
James Harlan, III, Trustee
Sykes Family Trust
By:/s/ W. David Sykes
------------------------------
W. David Sykes, Trustee
16
AMENDMENT NO. 2 TO
------------------
PURCHASE AGREEMENT
------------------
This AMENDMENT NO. 2 TO PURCHASE AGREEMENT (the "Agreement") is entered
into as of the 8th day of June, 1999 by and between nSTOR TECHNOLOGIES, INC., a
Delaware corporation ("nStor"), and W. DAVID SYKES, an individual ("D. Sykes"),
the SYKES FAMILY TRUST and the SYKES CHILDREN'S TRUST OF 1993 dated November 22,
1993 (collectively, the "Trusts"). D. Sykes and the Trusts are referred to
herein together as "Sykes," and Sykes, D. Sykes, the Trusts and nStor are
sometimes referred to herein individually as a "Party," and together as the
"Parties".
RECITALS
The Trusts are the owners of 18,021,281 shares of the common stock (the
"Shares") of Andataco, Inc., a Massachusetts corporation ("Andataco"), and D.
Sykes is the owner of a certain promissory note of Andataco owned by and payable
to D. Sykes in the face amount of $5,196,000 (the "Note").
On March 2, 1999, nStor, D. Sykes and the Trusts entered into an
agreement for the sale of the Shares and the Note to nStor (the "Agreement"),
which Agreement was amended on April 26, 1999.
The Trusts wish to sell the Shares to nStor, and nStor wishes to
purchase the Shares from the Trusts, upon the terms and subject to the
conditions provided in the Agreement, as further amended by this Amendment No.
2.
D. Sykes wishes to sell the Note to nStor and enter into an employment
agreement with nStor, and nStor wishes to purchase the Note from D. Sykes and
enter into an employment agreement with D. Sykes, all upon the terms and subject
to the conditions provided in the Agreement, as further amended by this
Amendment No. 2.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants and agreements
and the payment of valuable consideration as provided herein, and intending to
be legally bound, the Parties agree as follows:
1. Purchase of the Shares by nStor
The Trusts agree to sell, assign, transfer and convey the Shares to
nStor, and nStor agrees to purchase the Shares from the Trusts, for a purchase
price of $5,100,000 (the "Stock Purchase Price"), payable on the Closing (as
hereinafter defined) by delivery to the Trusts, in proportion to their ownership
of the Shares, of two subordinated promissory notes of nStor in the form
attached hereto as EXHIBIT A (the "Notes") in the aggregate principal amount of
$5,100,000, subject to the terms and conditions of this Agreement.
<PAGE>
2. Purchase of the Note by nStor
(a) D. Sykes agrees to sell, assign, transfer and convey the Note to
nStor, and nStor agrees to purchase the Note from D. Sykes, for a cash purchase
price of $500,000, of which $150,000 has been paid previously, and $4,654,000 in
the form of 4,654 shares of nStor's Series F Convertible Preferred Stock (the
"Series F Stock")(the $500,000 cash purchase price and the Series F Stock are
collectively referred to herein as the "Note Purchase Price"), payable on the
Closing by wire transfer or certified check and the delivery of the Series F
Stock, subject to the terms and conditions of this Agreement. D. Sykes agrees to
accept the Note Purchase Price in full payment for the assignment, transfer and
conveyance of the Note and full payment and satisfaction of any and all other
indebtedness, obligations and liabilities of Andataco to D. Sykes, whether due,
accrued or contingent, including, without limitation, payments by Andataco to D.
Sykes for retirement benefits (collectively, the "Indebtedness"). Nothing in
this Section 2(a) shall affect in any manner any vested rights of D. Sykes in
any Andataco retirement plans and D. Sykes shall be entitled to control all
investments in such Andataco retirement plans.
(b) The Indebtedness shall not include the Notes, and all amounts due
and payable under the Notes, the Employment Agreement between D. Sykes and
Andataco dated as of May 1, 1997 (the "Andataco Employment Agreement"), the
Noncompetition Agreement between Andataco and D. Sykes dated as of June 3, 1997
(the "Noncompetition Agreement"), or any participation by Andataco in the
Employment Agreement described in Section 3 hereof. If requested by nStor or
Andataco, at any time on or after the Closing Date (as hereinafter defined), D.
Sykes shall execute and deliver to Andataco an unconditional general release and
all original instruments evidencing the Indebtedness marked "paid in full,"
subject only to the exceptions provided in the immediately preceding sentence,
and D. Sykes shall execute and deliver such other agreements, instruments and
documents as counsel to nStor or Andataco may reasonably request to further
evidence the payment, discharge and satisfaction of the Indebtedness. In the
event that nStor or any of its subsidiaries or affiliates acquires all
outstanding shares of voting stock of Andataco in addition to the Shares, D.
Sykes shall immediately enter into a written agreement with Andataco
terminating, and execute and deliver to Andataco an unconditional general
release as to, the Noncompetition Agreement. Nothing contained in this Section 2
shall affect in any manner the right of D. Sykes, as an officer and director of
Andataco, to indemnification by Andataco as presently provided or to coverage
under the current Andataco director and officer insurance policy.
3. Employment of D. Sykes.
(a) Sykes and nStor's wholly owned subsidiary, nStor Corporation (the
"Company") shall enter into an employment agreement in the form attached hereto
as EXHIBIT B (the "Employment Agreement"), effective on the date on which nStor
or any of its subsidiaries or affiliates acquires all outstanding voting stock
of Andataco in addition to the Shares. nStor shall cause the Company to execute
and deliver the Employment Agreement. The Employment Agreement shall be executed
on the Closing Date by D. Sykes and the Company and delivered to counsel for
nStor and D. Sykes to jointly hold in escrow on behalf
2
<PAGE>
of nStor and D. Sykes, respectively, and to date and deliver to D. Sykes and the
Company upon the occurrence of the condition set forth in the first sentence of
this Section 3(a).
(b) D. Sykes shall also continue to be employed by Andataco in his
present capacity pursuant to the Andataco Employment Agreement as provided in
Section 1(b) of the Employment Agreement. In addition, so long as the Andataco
Board of Directors determines that it does not constitute a breach of the
Noncompetition Agreement, D. Sykes agrees that, commencing on the Closing Date
and during the time that he continues to be employed by Andataco before the
Employment Agreement is executed and delivered, he will perform services for the
Company on a "loaned executive" basis, substantially the same as his
responsibilities and duties as described in the Employment Agreement and in
consideration of the "Compensation" as defined and provided in Section 1(b)(ii)
of the Employment Agreement; provided, however, that (a) in the event Sykes
receives total compensation from the Company and Andataco in excess of the
Compensation payable to Sykes during such period of time (including, without
limitation, payments under the Noncompetition Agreement prior to its termination
as provided in Section 2 hereof), such excess shall be repaid by deductions from
any bonus compensation due D. Sykes for the period ended December 31, 1999
pursuant to Section 3(b) of the Employment Agreement; provided further, however,
that if the excess exceeds the bonus compensation payable for that period, it
shall not carryover in the next bonus period and D. Sykes shall keep such
excess, and (b) the grant of the Option pursuant to Section 4 of the Employment
Agreement shall be retroactive to the Closing Date. Further, D. Sykes agrees to
enter into an Amended and Restated Andataco Employment Agreement as provided in
Section 1(b)(iii) of the Employment Agreement.
4. Agreement Not to Compete
D. Sykes recognizes that (i) Andataco has spent substantial money, time
and effort in developing and solidifying its relationships with its suppliers
and customers, (ii) long-term supplier and customer relationships often can be
difficult to develop, (iii) Andataco paid and pays its employees to, among other
things, develop and preserve business information, supplier and customer
goodwill, loyalty and contacts for and on behalf of Andataco, and (iv) nStor is
hereby agreeing to purchase the Shares from Sykes based upon D. Sykes'
assurances and promises contained herein not to take or divert Andataco's
suppliers' and customers' goodwill, including such suppliers' and customer's
goodwill as part of the combined businesses of Andataco and the Company as
contemplated by this Agreement and the Employment Agreement (for the purpose of
this Section 4, all references to the Company shall be deemed to be references
to the Company and Andataco). Accordingly, D. Sykes covenants and agrees that
for lesser of a period of three years following the Closing Date or a period of
one year following the termination for any reason of his employment by the
Company (or any successor to the business of the Company), he will not, directly
or indirectly:
(a) engage, either as principal, agent or consultant, or through any
corporation, firm, organization or other entity (a "Competitive Entity") in
which he may be an officer, director, employee, stockholder, partner, member, or
with which he is otherwise affiliated, in any activity or business that is in
competition with the business of the Company in any
3
<PAGE>
geographic area in the United States or in any other country where the Company
is doing business;
(b) on behalf of any Competitive Entity, solicit, call on, or in any
manner cause or attempt to cause or provide any Confidential Information (as
defined in the Employment Agreement) to any customer or active prospective
customer of the Company, or divert, terminate, limit, modify or fail to enter
into any existing or potential relationship between the Company and any customer
or active prospective customer of the Company; or
(c) induce or attempt to induce any employee, consultant or advisor of
the Company to accept employment or an affiliation with any Competitive Entity.
D. Sykes agrees that if he violates any of the provisions of this Section 4, the
Company would sustain irreparable harm and, therefore, in addition to any other
remedies that might be available to it, the Company shall be entitled to an
injunction restraining D. Sykes from committing or continuing any such violation
without the requirement to post a bond or other security. The Company and D.
Sykes agree that in the event any of the provisions of this Section 4 shall be
held to be in any way an unreasonable restriction on D. Sykes, the court so
holding may reduce the geographical area and/or period of time in which such
provision operates, or modify or eliminate any such restriction to the extent
necessary to render such provisions enforceable. Nothing in this Section 4 shall
be deemed to negate or limit in any manner the covenants and agreements of D.
Sykes pursuant to Section 6 of the Employment Agreement, but shall be in
addition thereto.
5. Representations and Warranties of Sykes
In order to induce nStor into entering into this Agreement and to
purchase the Shares and the Note, Sykes hereby represent and warrants to nStor,
which representations and warranties shall remain true and correct on the
Closing Date, and covenant and agree with nStor, as follows:
(a) The Trusts are, and on the Closing Date will be, the owner of the
Shares, free and clear of any and all liens, claims, encumbrances and
restrictions, and the Shares may be sold, assigned, transferred and conveyed to
nStor without the requirement of any consent or approval by Andataco or any
other party, including, without limitation, the consent or approval of any party
whose failure to give such consent or approval would have an adverse effect on
Andataco, other than consents or approvals that shall be obtained by the Trusts
and delivered to nStor on or before the Closing.
(b) The Note is assignable by D. Sykes to nStor without the requirement
of any consent or approval by Andataco or any other party, and upon the purchase
of the Note by nStor shall be the valid and binding obligation of Andataco and
enforceable by nStor in accordance with its terms in the same manner as if owned
by D. Sykes.
(c) When executed and delivered by Sykes, this Agreement will
constitute a valid and legally binding obligation of Sykes enforceable in
accordance with its terms, except as may
4
<PAGE>
be limited by (i) judicial principles respecting election of remedies or
limiting the availability of specific performance, injunctive relief and other
equitable remedies, (ii) judicial principles with respect to provisions contrary
to public policy, and (iii) bankruptcy, insolvency, reorganization, moratorium
or other similar laws, now or hereafter in effect, generally relating to
creditors' rights.
(d) To Sykes' knowledge, Andataco is duly organized, validly existing
and in good standing under the laws of the Commonwealth of Massachusetts and is
qualified to do business and in good standing in each other jurisdiction where
the business of Andataco requires it to be so qualified, including, without
limitation, the State of California. To Sykes' knowledge, Andataco has all
requisite corporate power and authority to own its assets and to carry on its
business as presently conducted in each jurisdiction where such assets is
located and such business is conducted.
(e) Attached hereto as EXHIBIT C is a copy of Andataco's Form 10-K for
the fiscal year ended October 31, 1998 (the "1998 10-K") and its Form 10-Q for
the quarter ended January 31, 1999. The 1998 10-K does not contain any untrue
statement of a material fact or omit to state any material fact necessary in
order to make each statement contained therein not misleading. From and after
January 31, 1999, to D. Sykes' knowledge, no events have occurred or are
threatened that would materially affect the financial condition, assets or
business of Andataco.
(f) As of the date of this Agreement, Andataco's only authorized
capital stock consists of the common and preferred stock as described in the
1998 10-K, and there are no issued shares of any class of voting stock of
Andataco other than the class of which the Shares are a part. Of the authorized
common stock, 23,819,399 shares are issued and outstanding and of these
18,021,281 shares are owned by the Trusts and constitute the Shares. The Shares
constitute the only common stock of Andataco in which Sykes has a direct or
beneficial interest. The 1998 10-K accurately and fairly describes Andataco's
1997 Equity Incentive Plan, as amended (the "Plan"). The Plan, the Andataco 1996
Stock Option Plan, the Andataco 1993/1991 Stock Option Plan, the Andataco
Director Stock Option Plan and the 180,000 warrants issued to Imperial Bank are
the only plans, agreements or commitments of Andataco to issue additional
authorized capital stock.
6. Representations and Warranties of nStor
In order to induce Sykes to enter into this Agreement and to sell the
Shares and the Note, nStor represents and warrants to Sykes as of the date
hereof, and as of the Closing Date, and covenants and agrees with Sykes, as
follows:
(a) nStor is a corporation duly organized, validly existing and in good
standing within the laws of the State of Delaware and has all requisite and
corporate authority to carry on business as it is now carried on and conducted.
When executed and delivered by nStor, this Agreement will constitute a valid and
legally binding obligation of nStor enforceable in accordance with its terms,
except as may be limited by (i) judicial principles respecting election of
remedies or limiting the availability of specific performance, injunctive relief
and
5
<PAGE>
other equitable remedies, (ii) judicial principles with respect to provisions
contrary to public policy, and (iii) bankruptcy, insolvency, reorganization,
moratorium or other similar laws, now or hereafter in effect, generally relating
to creditors' rights.
(b) nStor (i) is acquiring the Shares and the Note for investment
purposes only, for its own account, and not with the view to, or for resale in
connection with, any distribution thereof; and (ii) has such knowledge and
experience in financial and business matters that it is capable of evaluating
the merits and risks of this investment and is able to bear the economic risk of
this investment. nStor's (iii) purchase of the Shares and the Note has not been
accompanied by the publication of any advertisement, and (iv) the purchase of
the Shares and the Note has not been effected by or through a broker-dealer in a
public offering. nStor (v) has had the opportunity to ask questions of the
directors, officers and employees of Andataco and has obtained and carefully
reviewed and considered all the information regarding Andataco that nStor
considers necessary or appropriate to decide whether to purchase the Shares and
the Note, and (vi) Sykes and Andataco have provided nStor with access to all
financial information, records, documents, contracts, agreements, court filings,
case records and ledgers relating to Andataco.
(c) nStor (i) has adequate means of providing for its current needs and
possible contingencies, and has no need now, and anticipates no need in the
foreseeable future, to sell the Shares or the Note which it is hereby purchasing
and (ii) is able to bear the economic risks of this investment, and,
consequently, without limiting the generality of the foregoing, is able to hold
its Shares and the Note indefinitely and has a sufficient net worth to sustain a
loss of its entire investment in Andataco in the event such loss should occur.
(d) nStor acknowledges and agrees that neither the Shares nor the Note
have been registered under the Securities Act of 1933, as amended (the "Act") or
under the California Corporate Securities Law of 1968, as amended (the
"California Law") or other applicable law, and that accordingly the Shares and
the Note will not be fully transferable except as permitted under various
exemptions contained in the Act, California Law or other applicable state law,
or upon satisfaction of the registration requirements of the Act, the
qualification requirements of California Law or other applicable state law, or
the registration requirements of other applicable state securities laws. nStor
hereby acknowledges and agrees that the certificates representing the Shares and
the Note will bear any legends required under the Act, California Law or other
applicable state law.
(e) If nStor acquires the common stock of Andataco held by shareholders
other than the Trusts, it will do so for consideration no less than the greater
of the price per share received by the Trusts for the Shares or the fair market
value of such stock valued as of the day immediately prior to the date of
execution of this Agreement as stated in an opinion obtained prior to such
acquisition from a recognized investment banking firm. nStor agrees that the
shareholders of Andataco other than the Trusts shall be given and advised of
their "dissenter's" rights, as provided under Massachusetts law and all other
applicable law, in connection with any acquisition by nStor of their shares of
Andataco stock.
6
<PAGE>
(f) nStor acknowledges that the Shares are subject to the terms and
conditions of that certain Lock-Up Agreement, dated June 3, 1997, a copy of
which is attached hereto as EXHIBIT D and that, upon the purchase of the Shares,
it will be bound by the terms and conditions of that Agreement.
(g) The rights, privileges and preferences of nStor's Series E
Preferred Stock are set forth in EXHIBIT E attached hereto. nStor has received a
total of $3.5 million from the sale of Series E Preferred Stock prior to the
date hereof.
7. Confidentiality; Disclosure
(a) The existence and contents of this Agreement, the existence of
negotiations between the Parties and all documents and information obtained by
either Party from the other Party, regardless of identifying mark or label and
whether written, oral or in electronic form, shall remain strictly confidential
(the "Confidential Information"), and neither of the Parties shall reveal any of
the Confidential Information or provide any copies of any documents or other
materials relating to the Confidential Information to any person, corporation or
other entity, other than the Board of Directors and senior officers of and the
attorneys and financial advisors for Andataco, without the prior written consent
of the providing Party.
(b) The Parties understand that the transactions contemplated herein
will require, pursuant to applicable securities and other laws, a public
announcement by nStor upon the Closing. Such a press release, describing all of
the relevant terms and conditions of the transactions contemplated by this
Agreement, may be issued by nStor upon such Closing. Sykes also acknowledges
that nStor will be required to file a Schedule 13D pursuant to Rule 13d-1 of the
Securities Exchange Act of 1934 upon the Closing.
(c) nStor shall maintain Andataco's current director and officer
insurance policy or equivalent for a period of two years after the Closing.
nStor shall not alter the current indemnification rights of Andataco officers
and directors until the sooner of (i) two years after the Closing or (ii) the
termination of the separate existence of Andataco.
8. Lease Guaranty
nStor has delivered, simultaneously herewith, a written guaranty of
Andataco's performance under the real property lease between Syko Properties,
Inc., a corporation owned and/or controlled by D. Sykes, as lessor, and
Andataco, as lessee, dated as of January 1, 1993, as amended, pursuant to which
Andataco leases the premises in which it conduct business in San Diego,
California (the "Lease"). nStor's obligation under this Section 8 is conditioned
upon the Lease being terminable by Andataco in its sole discretion at any time
upon nine months notice to the lessor.
9. Closing
The closing and consummation of all transactions provided in this
Agreement (the "Closing") shall take place at 10:00 A.M. on June 8, 1999 (the
"Closing Date"), at the offices
7
<PAGE>
of Akerman, Senterfitt & Eidson, P.A., counsel to nStor, 450 East Las Olas
Boulevard, Suite 950, Fort Lauderdale, Florida 33301, or on such other day and
at such other time and place as the Parties may mutually agree.
10. Deposits
On the Closing Date, the $150,000 deposit previously delivered to Sykes
will be credited against the Note Purchase Price.
11. Expenses
Each Party shall bear its and his own expenses, including legal and
accounting fees and costs, in connection with this Agreement and the Closing;
provided, however, that, at the Closing, nStor shall reimburse Sykes for
documented attorney, accountant and investment banking fees and expenses up to
the amount of $470,000, or such lesser amount as may be due with respect to such
fees and expenses.
12. Indemnification
(a) Indemnification by nStor. nStor shall indemnify, defend and hold
harmless Sykes against any and all damages, losses, claims, liabilities,
charges, suits, penalties, costs and expenses, including court costs, attorneys'
fees and expenses and other costs of collection (collectively "Loss" or
"Losses"), which Sykes personally may sustain, or to which he may be subjected,
arising out of or attributable to: (i) the failure of nStor to consummate the
acquisition of the Shares and the Note for other than nStor's right to terminate
pursuant to Section 11 hereof; (ii) the failure of nStor or its officers,
directors, shareholders, affiliates, employees or agents to treat the minority
shareholders of Andataco, Inc. fairly or properly after the Closing; or (iii)
any actions brought against Sykes by third parties as a result of the
consummation of the transactions contemplated hereby.
(b) Notice and Resolution of Indemnity Claims. If at any time Sykes
shall claim indemnification from nStor for any Loss or, in the reasonable
judgment of Sykes, for what, in the future, may result in a Loss ("Anticipated
Loss") due to the filing, at or before the time of such claim, of an action,
claim or suit with an arbitrator, mediator, court or other governmental entity
("Claim"), then Sykes shall send written notice of the same (a "Notice of
Claim") to nStor. A Notice of Claim shall specify the basis for such Claim
supported by relevant information and documentation.
(i) If nStor shall object to such Claim, it shall give written
notice of such objection (a "Notice of Objection") to Sykes within 15
days after receipt by nStor of the Notice of Claim, specifying the
basis of the objections supported by relevant information and
documentation with respect thereto. If nStor does not give a Notice of
Objection within such 15 days, or shall have agreed to pay such Claim
in whole or in part within such 15-day period, nStor shall thereupon be
liable for the payment of such Claim.
8
<PAGE>
(ii) In the event that nStor shall have timely given a Notice
of Objection in whole or in part to any Notice of Claim, during the
20-day period following that date, nStor and Sykes shall privately
attempt to resolve the Claim. If nStor and Sykes shall have failed to
resolve or compromise or agree to postpone resolution of the Claim
within the 20--day period, then the Claim shall be settled by
arbitration in San Diego, California, as determined by the three
arbitrators referred to in Section 12(b)(iii) below, in accordance with
the rules of the American Arbitration Association and the procedures
set forth below.
(iii) Each of (A) Sykes and (B) nStor shall appoint one
arbitrator, and the two arbitrators so appointed shall then together
appoint a third arbitrator ("neutral arbitrator") from a list of
persons supplied by the American Arbitration Association in San Diego,
California. If one party shall fail to appoint the arbitrator to be
appointed by it within 15 days of the end of the 20-day period provided
for in Section 12(b)(ii) above, the arbitrator appointed by the other
party shall select from a list of persons supplied by the American
Arbitration Association a person who shall serve as the single neutral
arbitrator for purposes of the arbitration. If each party shall have
appointed one arbitrator, but such designees cannot agree on the person
to act as the neutral arbitrator within a period of 15 days after the
appointment of the second arbitrator, then either party may apply to
the American Arbitration Association in San Diego, California, which
shall appoint a neutral arbitrator. As used hereafter the term
"arbitrator" shall include the singular and the plural as applicable.
The arbitrator shall conduct the arbitration with all reasonable
dispatch in accordance with the rules of the American Arbitration
Association, provided, however, that the parties to such arbitration
shall take such action and execute such instruments as shall be
necessary to cause the California Rules of Civil Procedure pertaining
to pre-trial discovery to be applicable in respect of such proceeding.
The arbitrator shall render a written award (the "Award") which shall
be delivered to Sykes and nStor. An Award hereunder may be used as a
basis for the entry of judgment in any jurisdiction. In the event the
parties have submitted a Claim for an Anticipated Loss to arbitration
under this Section 12(b)(iii), then the arbitrator may, in its sole
discretion, postpone resolution of the Claim until the time which it
has determined, in its sole discretion, to be the time when such
Anticipated Loss shall have occurred or passed has been reached.
(iv) Prior to making the Award, the arbitrator shall direct
Sykes and nStor to submit statements describing any element of Loss or
Anticipated Loss as to which a Claim is made that is attributable to
attorneys' fees, disbursements, and any similar costs incident to such
Loss or Anticipated Loss, supported by affidavits showing that such
costs actually have been or are likely to be incurred, and all such
attorneys' fees, disbursements and other costs shall be apportioned as
determined by the arbitrator. All fees of the arbitrator and
administrative expenses of the American Arbitration Association shall
be treated as costs for purposes of this Article. As a part of each
Award made pursuant to this Agreement, the arbitrator shall allow
interest thereon (other than on the portion of the Award representing
attorneys' fees, disbursements and costs) from the date of the Loss or
the date the Anticipated Loss becomes a Loss to the date of payment at
the rate of 10% per annum.
9
<PAGE>
(v) The Award shall be a conclusive determination of the
matter and shall be binding upon Sykes and nStor, and shall not be
contested by either of them. nStor shall satisfy its obligations to pay
an Award in cash.
(vi) If a the subject of a Claim involves a third-party claim
which has not yet been determined, the arbitrator may in his discretion
make a separate determination solely as to whether the third-party
claim is one for which indemnification may be had or may defer a
determination as to whether indemnification may be had pending the
further development of information as to the nature of the third-party
claim. If the arbitrator determines that the third-party claim is not
subject to indemnification, he shall set forth the basis of his
decision in detail, which decision shall be deemed to be an "Award"
hereunder.
(vii) Promptly after the assertion by any third party of any
claim against Sykes that, in the judgment of Sykes, may result in the
incurrence by Sykes of Loss for which Sykes would be entitled to
indemnification, Sykes shall deliver to nStor a Notice of Anticipated
Loss describing in reasonable detail such Claim. If Sykes request nStor
defend him against such Claim, then nStor may, at its option, assume
the defense of Sykes against such Claim (including the employment of
counsel, who shall be counsel satisfactory to Sykes,) and the payment
of expenses. If Sykes does not request nStor to defend him against such
Claim or nStor fails to assume the defense of such Claim within a
reasonable time after having been requested by Sykes to assume the
defense, then Sykes shall have the right to defend himself in any such
action and, if appropriate under Section 12(a) above, be indemnified
for his costs and fees of defense by nStor. nStor shall not be liable
to indemnify Sykes for any settlement of any such action or claim
effected without the consent of nStor, but if settled with the written
consent of nStor, or if there be a final judgment for the plaintiff in
any such action, nStor shall indemnify and hold harmless Sykes from and
against any Loss by reason of such settlement or judgment and nStor
shall thereupon be liable for the payment of such Loss.
13. Miscellaneous
(a) Entire Agreement. This Agreement and the Employment Agreement, when
executed (collectively, the "Party Agreements"), constitute the complete and
exclusive statement of the agreement between the Parties with respect to the
subject matter of the Party Agreements. The Party Agreements replace and
supersede all prior agreements and negotiations by and between the Parties and
each of the Parties acknowledges and agrees that no agreements, representations,
warranties or collateral promises or inducements have been made by or to it or
him except as expressly set forth in the Party Agreements. These acknowledgments
and agreements are contractual and not mere recitals.
(b) Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the Parties and their respective successors and
permitted assigns and Sykes' personal representatives, executors, administrators
and beneficiaries; provided, however, that neither
10
<PAGE>
Party shall assign this Agreement or any of its or his rights or obligations
hereunder without the prior written consent of the other Party, which consent
may be withheld or delayed in the sole discretion of Party whose consent is
requested.
(c) No Third Party Beneficiary. Nothing expressed or implied in this
Agreement is intended, or shall be construed, to confer upon or give any person,
firm, corporation, partnership, association or other entity, other than the
Parties and their respective successors and permitted assigns, any rights or
remedies under or by reason of this Agreement, except that Andataco shall be a
third party beneficiary and entitled to enforce in its own name the provisions
of the second and third sentences of Section 2(b).
(d) Survivability. Notwithstanding any investigation made by or on
behalf of either Party, the representations and warranties made under and in
connection with this Agreement shall survive the Closing and consummation of all
the transactions contemplated hereby for a period of one year.
(e) Waivers and Remedies. The waiver by either of the Parties of the
other Party's prompt and complete performance, or breach or violation, of any
provision of this Agreement shall not operate nor be construed as a waiver of
any subsequent breach or violation, and the waiver by either of the Parties to
exercise any right or remedy which it may possess hereunder shall not operate
nor be construed as a bar to the exercise of such right or remedy by such Party
upon the occurrence of any subsequent breach or violation.
(f) Severability. The invalidity of any one or more of the words,
phrases, sentences, clauses, sections or subsections contained in this Agreement
shall not affect the enforceability of the remaining portions of this Agreement
or any part hereof, all of which are inserted conditionally on their being valid
in law, and, in the event that any one or more of the words, phrases, sentences,
clauses, sections or subsections contained in this Agreement shall be declared
invalid by a court of competent jurisdiction, this Agreement shall be construed
as if such invalid word or words, phrase or phrases, sentence or sentences,
clause or clauses, section or sections, or subsection or subsections had not
been inserted.
(g) Descriptive Headings/Recitals. Descriptive headings contained
herein are for convenience only and shall not control or affect the meaning or
construction of any provision of this Agreement. The Recitals are incorporated
into and made a part of this Agreement.
(h) Counterparts and Facsimile Signatures. This Agreement may be
executed in counterparts by the separate Parties, all of which shall be deemed
to be one and the same instrument. Facsimile signatures shall have the same
effect as original signatures.
(i) Notices. Any notice, request or other communication to either Party
by the other hereunder shall be deemed given on the earlier of the date (i)
actually received and acknowledged; (ii) three (3) days after its mailing by
certified or registered mail, return receipt requested, postage prepaid; or,
(iii) on the business day immediately following its delivery (evidenced by
receipt) to any reputable overnight carrier or transmission via facsimile in
each case addressed to the Party for which it is intended at the address (or
facsimile transmission
11
<PAGE>
number) set forth in this Agreement. The place to which notices are to be given
to any Party may be changed from time to time by such Party by like notice to
the other. Notices shall be addressed as follows:
If to nStor:
------------
H. Irwin Levy, Chairman
nStor Technologies, Inc.
100 Century Boulevard
West Palm Beach, FL 33417
Fax: (561) 640-3160
and
Lawrence Steffann, President
nStor Technologies, Inc.
450 Technology Park Boulevard
Lake Mary, FL 32746
Fax: (407) 829-3627
With a copy to:
Akerman Senterfitt & Eidson, P.A.
450 East Las Olas Boulevard
Suite 950
Fort Lauderdale, FL 33301
Attn: Donn Beloff, Esq.
Fax: (954) 463-2224
If to Sykes:
------------
W. David Sykes
c/o Andataco, Inc.
10140 Mesa Rim Road
San Diego, CA 92121
Fax: (619) 453-2676
With a copy to:
Luce, Forward, Hamilton & Scripps LLP
600 West Broadway, Suite 2600
San Diego, California 92101
Attn: Dennis J. Doucette, Esq.
Fax: (619) 232-8311
12
<PAGE>
(j) Applicable Law. This Agreement shall be governed by, and shall be
construed, interpreted and enforced in accordance with, the laws of the State of
Florida, without regard to principles of conflict of laws.
(k) Brokers and Agents. nStor represents to Sykes that no broker,
finder or agent has acted on behalf of nStor with respect to the transactions
provided in the Party Agreements, and agrees to indemnify and hold Sykes
harmless in the event of any loss, claim, demand or expense asserted against or
incurred by Sykes relating to the payment of any fees or commissions by any such
broker, finder or agent acting on behalf of nStor. Other than as provided in
Section 11(a) hereof, Sykes agrees that Sykes will pay or cause to be paid any
broker, finder or agent that has acted on Sykes' behalf with respect to the
transactions provided in the Party Agreements, and agrees to indemnify and hold
nStor harmless in the event of any loss, claim, demand or expense asserted
against or incurred by nStor relating to the payment of any fees or commissions
by any such broker, finder or agent acting on behalf of Sykes.
(l) Modifications. This Agreement may not be altered, modified or
amended except by a writing signed by the Parties.
(m) Further Assurances. The Parties agree to execute and deliver, or
cause to be executed and delivered, such further instruments or documents and
take such other action as may be reasonably required effectively to carry out
the transactions contemplated herein.
IN WITNESS WHEREOF, the Parties have duly executed this Agreement as of
the date first above written.
nStor Technologies, Inc.
By: /s/ Mark Levy
-------------------------------
Name: Mark Levy
-----------------------------
Title: Vice President
----------------------------
/s/ W. David Sykes
-----------------------------
W. David Sykes, individually
Sykes Children's Trust of 1993
By: /s/ James Harlan, III
-------------------------------
James Harlan, III, Trustee
Sykes Family Trust
By: /s/ W. David Sykes
-------------------------------
W. David Sykes, Trustee
13
Certificate of Designation of Series E
Convertible Preferred Stock
of
nStor Technologies, Inc.
It is certified that:
A. The name of the company is nStor Technologies, Inc., a Delaware
corporation (hereinafter the "Company").
B. The certificate of the incorporation of the Company, as amended,
authorizes the issuance of one million (1,000,000) shares of shares of Preferred
Stock, $.01 par value per share, and expressly vests in the Board of Directors
of the Company the authority provided therein to issue all of said shares in one
or more series and by resolution or resolutions to establish the designation and
number and to fix the relative rights and preferences of each series to be
issued.
C. The Board of Directors of the Company, pursuant to the authority
expressly vested in it, has adopted the following resolutions creating a class
of Series E Convertible Preferred Stock:
RESOLVED, that a portion of the one million (1,000,000) authorized
shares of Preferred Stock of the Company shall be designated as a separate
series possessing the rights and preferences set forth below:
1. Designation and Amount. The shares of such series shall have a par
value of $.01 per share and shall be designated as Series E Preferred Stock (the
"Series E Preferred Stock") and the number of shares constituting the Series E
Preferred Stock shall be Three Thousand Five Hundred (3,500). The Company may
issue fractional shares of Series E Preferred Stock. Each whole share of Series
E Preferred Stock shall have a stated value of One Thousand Dollars ($1,000)
(the "Stated Value"). For purposes of this Certificate of Designation, the
"Closing Date" shall mean the date on which the shares of Series E Preferred
Stock are initially issued.
2. Dividends. The holders of the outstanding shares of Series E
Preferred Stock shall be entitled to receive dividends at the following annual
rates, as permitted by law: eight percent (8%) during the period from the
Closing Date to the first anniversary of the Closing Date; nine percent (9%)
during the period from the first anniversary of the Closing Date to the second
anniversary of the Closing Date; and, ten percent (10%) during the period
following the second anniversary of the Closing Date. Such dividends shall be
payable quarterly. Such dividends shall be cumulative, whether or not there are
profits, surplus or other funds of the Company legally available for the payment
of dividends. If there shall not have been a sum sufficient for the payment
therefor set apart, the deficiency shall first be paid before any dividend or
other distribution shall be paid or declared and set apart with respect to any
other class of the Company's capital stock, now or hereafter outstanding. All
accrued dividends shall be
<PAGE>
immediately due and payable on the outstanding shares of Series E Preferred
Stock on the date such shares of Series E Preferred Stock are converted into
shares of common stock, par value $.05 per share, ("Common Stock") in accordance
with Section 5 hereof, which date shall be the "Conversion Date". Dividends may
be paid in cash or additional shares of Common Stock of the Company, as may be
determined, from time to time, in the sole discretion of the Board of Directors.
3. Liquidation, Dissolution or Winding Up.
(a) In the event of any liquidation, dissolution or winding up
of the Company, whether voluntary or involuntary, before any distribution may be
made with respect to the Common Stock or any other series of capital stock
issued after the date hereof, holders of each share of Series E Preferred Stock
shall be entitled to be paid out of the assets of the Company available for
distribution to holders of the Company's capital stock of all classes, whether
such assets are capital, surplus, or capital earnings, such amount per share of
Series E Preferred Stock as would have been payable had each such share been
converted into Common Stock immediately prior to such event of liquidation,
dissolution or winding up pursuant to the provisions of Section 5 (collectively,
the "Liquidation Amount").
(b) If the assets of the Company available for distribution to
its shareholders shall be insufficient to pay the holders of shares of Series E
Preferred Stock the full amount of the Liquidation Amount to which they shall be
entitled, the holders of shares of Series E Preferred Stock shall share ratably
in any distribution of assets according to the amounts which would be payable
with respect to the shares of Series E Preferred Stock held by them upon such
distribution if all amounts payable on or with respect to said shares were paid
in full.
(c) After the payment of the Liquidation Amount shall have
been made in full to the holders of the Series E Preferred Stock or funds
necessary for such payment shall have been set aside by the Company in trust for
the account of holders of the Series E Preferred Stock so as to be available for
such payments, the holders of the Series E Preferred Stock shall be entitled to
no further participation in the distribution of the assets of the Company, and
the remaining assets of the Company legally available for distribution to its
shareholders shall be distributed among the holders of other classes of
securities of the Company in accordance with their respective terms.
4. Voting Power. Except as otherwise expressly provided in Section 8
hereof, or as required by law, each holder of Series E Preferred Stock shall be
entitled to vote on all matters and shall be entitled to that number of votes
equal to the largest number of shares of Common Stock into which such holder's
shares of Series E Preferred Stock could be converted, pursuant to the
provisions of Section 5 hereof, at the record date for the determination of
shareholders entitled to vote on such matter or, if no such record date is
established, at the date such vote is taken or any written consent of
shareholders is solicited. Except as otherwise expressly provided herein or as
required by law, the holders of shares of Series E Preferred Stock and Common
Stock shall vote together as a single class on all matters. The holders of the
Common Stock shall not take any action by written consent without the prior
written consent of the holders of a majority of the Series E Preferred Stock.
2
<PAGE>
5. Conversion Rights for the Series E Preferred Stock. The holders of
Series E Preferred Stock shall have conversion rights as follows ("Conversion
Rights"):
(a) Right to Convert. Each holder of Series E Preferred Stock
shall be entitled (at the times and in the amounts set forth below) to convert,
in whole or in part, in multiples of one hundred (100) shares, shares of Series
E Preferred Stock, at the option of the holder.
(b) Conversion Rate. From and after the date of issuance, each
share of Series E Preferred Stock may be converted into Three Hundred
Thirty-Three and One-Third (333 1/3) shares of fully-paid and non-assessable
Common Stock.
(c) Stock Reclassifications; Stock Splits, Combinations and
Dividends. If the Common Stock issuable upon the conversion of the Series E
Preferred Stock shall be changed into the same or different number of shares of
any class or classes of stock, whether by reclassification, stock split, stock
dividend, or similar event, then and in each such event, the holder of each
share of Series E Preferred Stock shall have the right thereafter to convert
such share into the kind and amount of shares of stock and other securities and
property receivable upon such capital reorganization, reclassification or other
change which such holder would have received had its shares of Series E
Preferred Stock been converted immediately prior to such capital reorganization,
reclassification or other change.
(d) Capital Reorganization, Merger or Sale of Assets. If at
any time or from time to time there shall be a capital reorganization of the
Common Stock (other than a subdivision, combination, reclassification or
exchange of shares provided for in Section 5(d) above) or a merger or
consolidation of the Company with or into another corporation, or the sale of
all or substantially all of the Company's properties and assets to any other
person, or any transaction or series of related transactions in which more than
fifty percent (50%) of the outstanding voting securities of the Company (on an
as converted basis) is sold or assigned (any of which events is herein referred
to as a "Reorganization"), then as a part of such Reorganization, provision
shall be made so that the holders of the Series E Preferred Stock shall
thereafter be entitled to receive upon conversion of the Series E Preferred
Stock, the number of shares of stock or other securities or property of the
Company, or of the successor corporation resulting from such Reorganization, to
which such holder would have been entitled if such holder had converted its
shares of Series E Preferred Stock immediately prior to such Reorganization. In
any such case, appropriate adjustment shall be made in the application of the
provisions of this Section 5 with respect to the rights of the holders of the
Series E Preferred Stock after the Reorganization, to the end that the
provisions of this Section 5 (including adjustment of the number of shares
issuable upon conversion of the Series E Preferred Stock) shall be applicable
after that event in as nearly equivalent a manner as may be practicable.
3
<PAGE>
(e) Issuance of Certain Common Stock Below Conversion
Price.
(i) In case the Company, after the date hereof, shall
issue or sell shares of Common Stock at a price of less than $3.00 per share of
Common Stock (other than upon exercise of options to purchase common stock
issued to employees of the Company pursuant to an employee stock option or
similar plan or upon exercise or conversion of securities that are convertible
or exchangeable into Common Stock and that are outstanding as of June 1, 1999),
then in each case the number of shares of Common Stock issuable upon the
conversion of all Series E Preferred Stock shall be increased in a manner
determined by multiplying the number of shares of Common Stock theretofore
issuable upon the conversion of all of the Series E Preferred Stock then
outstanding by a fraction, of which the numerator shall be the number of shares
of Common Stock outstanding immediately prior to the sale or issuance plus the
number of additional shares of Common Stock offered for sale and of which the
denominator shall be the number of shares of Common Stock outstanding
immediately prior to the sale or issuance plus the number of shares of Common
Stock which the aggregate consideration to be received by the Company in
connection with such sale or issuance would purchase at $3.00 per share.
(ii) In case the Company shall issue or sell shares
of Common Stock in exchange for property other than cash or its equivalent, then
in determining the "price per share of Common Stock" and the "consideration"
receivable by or payable to the Company for purposes of this Section 5(e), the
Board of Directors of the Company shall determine, in good faith, the fair value
of such property.
(iii) Any increase of the number of shares of Common
Stock issuable upon conversion of the Series E Preferred Stock then outstanding
made pursuant to this Section 5(e) shall be allocated among such shares of
Series E Preferred Stock on a pro rata basis.
(f) Exercise of Conversion Rights.
(i) Holders of Series E Preferred Stock may exercise
their right to convert the Series E Preferred Stock by telecopying an executed
and completed notice (a "Notice of Conversion") to the Company and delivering
the original Notice of Conversion and the certificate representing the Series E
Preferred Stock by express courier. Each business day on which a Notice of
Conversion is telecopied to and received by the Company along with a copy of the
originally executed Series E Preferred Stock certificates in accordance with the
provisions hereof shall be deemed a "Conversion Date." For purposes hereof, the
term "business day" refers the hours between 9:00 a.m. and 5:00 p.m. on any day
on which banks are open for business in Palm Beach County, Florida. Provided
that the Company has received the original Notice of Conversion and Series E
Preferred Stock certificate being so converted, the Company will transmit, or
instruct its transfer agent to transmit, the certificates representing shares of
Common Stock issuable upon conversion of any share of Series E Preferred Stock
(together with the certificates representing the Series E Preferred Stock not so
converted) to the holder thereof via express courier, by electronic transfer or
otherwise, three business days after the receipt by the Company of the original
Series E Preferred Stock Certificate representing the shares being converted. In
addition to any other remedies which may be available to the holders of shares
of
4
<PAGE>
Series E Preferred Stock, in the event that the Company fails to deliver, or has
failed to contact its transfer agent to deliver, such shares of Common Stock
within such three (3) business day period, the holder will be entitled to revoke
the relevant Notice of Conversion by delivering a notice to such effect to the
Company whereupon the Company and the holder shall each be restored to their
respective positions immediately prior to delivery of such Notice of Conversion.
The Notice of Conversion and Series E Preferred Stock certificates representing
the portion of the Series E Preferred Stock converted shall be delivered to the
following address:
nSTOR TECHNOLOGIES, INC.
100 Century Blvd.
West Palm Beach, FL 33417
Fax: (561) 640-3160
(g) Lost or Stolen Certificates. Upon receipt by the Company
of evidence of the loss, theft, destruction or mutilation of any Series E
Preferred Stock certificate(s), and (in the case of loss, theft or destruction)
of indemnity or security reasonably satisfactory to the Company, and upon the
cancellation of the Series E Preferred Stock certificate(s), if mutilated, the
Company shall execute and deliver new certificates for Series E Preferred Stock
of like tenure and date. However, the Company shall not be obligated to reissue
such lost or stolen certificates for shares of Series E Preferred Stock if the
holder contemporaneously requests the Company to convert such Series E Preferred
Stock into Common Stock.
(h) Fractional Shares. The Company may, if it so elects, issue
fractional shares of Common Stock upon the conversion of shares of Series E
Preferred Stock. If the Company does not elect to issue fractional shares, the
Company shall pay to the holder of the shares of Series E Preferred Stock which
were converted a cash adjustment in respect of such fractional shares in an
amount equal to the same fraction of the market price per share of the Common
Stock (as determined in a reasonable manner prescribed by the Board of
Directors) as of the close of business on the Conversion Date. The determination
as to whether any fractional shares are issuable shall be based upon the total
number of shares of Series E Preferred Stock being converted at any one time by
any holder thereof, not upon each share of Series E Preferred Stock being
converted.
(i) Partial Conversion. In the event some but not all of the
shares of Series E Preferred Stock represented by a certificate or certificates
surrendered by a holder are converted, the Company shall execute and deliver to
or to the order of the holder, at the expense of the Company, a new certificate
representing the number of shares of Series E Preferred Stock which were not
converted.
(j) Reservation of Common Stock. The Company shall at all
times reserve and keep available out of its authorized but unissued shares of
Common Stock, solely for the purpose of effecting the conversion of the shares
of the Series E Preferred Stock, such number of its shares of Common Stock as
shall from time to time be sufficient or as may be available to effect the
conversion of all outstanding shares of the Series E Preferred Stock, and if at
any time the number of authorized but unissued shares of Common Stock shall not
be sufficient to effect the conversion
5
<PAGE>
of all the then outstanding shares of the Series E Preferred Stock, the Company
shall use its best efforts to take such corporate action as may be necessary to
increase its authorized but unissued shares of Common Stock to such number of
shares as shall be sufficient for such purpose.
6. Redemption.
(a) Optional Redemption by the Company During the Eight Months
After the Closing Date. Subject to the limitations contained in Section 6(e)
below, the Company may, at its option, during the period ending on the eighth
monthly anniversary of the Closing Date (the "Initial Redemption Period"), upon
(20) business days' notice to the Holders (a "Notice of Optional Redemption"),
redeem all (but not less than all) of the outstanding shares of Series E
Preferred Stock for cash, out of funds legally available therefor, at a price
equal to One Hundred Five Percent (105%) of the Stated Value of such shares of
Series E Preferred Stock, plus any accrued but unpaid dividends due thereon
prior to the redemption date. Nothing in this Section shall prohibit conversions
of the Series E Preferred Stock otherwise permitted pursuant to the terms of
this Certificate of Designation during the pendency of any Notice of Optional
Redemption by the Company hereunder.
(b) Optional Redemption by the Company After the Initial
Redemption Period. Subject to the limitations contained in Section 6(e) below,
the Company may, at its option, during the period beginning on the eighth
monthly anniversary of the Closing Date and any time thereafter, upon (20)
business days' notice to the Holders, redeem all (but not less than all) of the
outstanding shares of Series E Preferred Stock for cash out of funds legally
available therefor, at a price equal to One Hundred Ten Percent (110%) of the
Stated Value of such shares of Series E Preferred Stock, plus any accrued but
unpaid dividends due thereon prior to the redemption date. Nothing in this
Section shall prohibit conversions of the Series E Preferred Stock otherwise
permitted pursuant to the terms of this Certificate of Designation during the
pendency of any Notice of Optional Redemption by the Company hereunder.
(c) Mandatory Redemption by the Company in the Event of a
Public Offering. In the event that the Company registers any of its common stock
(a "Registration"), on its own behalf, under the Securities Act of 1933, as
amended (the "Securities Act") (other than a transaction described under Rule
145 of the Securities Act, a transaction registering securities convertible into
common stock or pursuant to Forms S-4, S-8 or their successor forms), the
Company shall (a "Mandatory Redemption"), upon (20) business days' notice to the
Holders (a "Notice of Mandatory Redemption"), redeem all (but not less than all)
of the outstanding shares of Series E Preferred Stock for cash out of funds
legally available therefor, at a price equal to (i) during the Initial
Redemption Period, One Hundred Five Percent (105%) of the Stated Value of such
shares of Series E Preferred Stock, plus any accrued but unpaid dividends due
thereon prior to the redemption date, and (ii) after the Initial Redemption
Period, One Hundred Ten Percent (110%) of the Stated Value of such shares of
Series E Preferred Stock, plus any accrued but unpaid dividends due thereon
prior to the redemption date. Nothing in this Section shall prohibit conversions
of the Series E Preferred Stock otherwise permitted pursuant to the terms of
this Certificate of Designation during the pendency of any Notice of Mandatory
Redemption by the Company hereunder.
(d) Participation in Public Offering. In the event that a
Holder, upon receipt of a Notice of Mandatory Redemption, elects to convert all
or any portion of its shares of Series E
6
<PAGE>
Preferred Stock, such Holder shall be entitled to include the shares of Common
Stock issuable upon such conversion in the Registration. In the event that a
Holder, upon receipt of a Notice of Mandatory Redemption, elects to convert all
or any portion of its shares of Series E Preferred Stock, but elects not to
include such shares in the Registration, such Holder shall agree to execute such
lockup agreement as the managing underwriter for the Registration may reasonably
require.
(e) Capital Impairment. In the event that Section 160 of the
Delaware General Business Corporation Law (the "DGCL") would be violated by the
redemption of any shares of Series E Preferred Stock that are otherwise subject
to redemption pursuant to this Section 6, the Company: (i) will redeem the
greatest number of shares of Series E Preferred Stock possible without violation
of said Section; (ii) the Company thereafter shall use its best efforts to take
all necessary steps permitted pursuant to this Certificate of Designation and
the agreements entered into in connection with the issuance of the Series E
Preferred Stock pursuant hereto in order to adjust its capital structure in
order to allow further redemptions without violation of said Section; and (iii)
from time to time thereafter as promptly as possible the Company shall redeem
shares of the Series E Preferred Stock at the request of the Holders to the
greatest extent possible without causing a violation of the DGCL.
7. No Reissuance of Series E Preferred Stock. Any share or shares of
Series E Preferred Stock acquired by the Company by reason of redemption,
purchase, conversion or otherwise shall be canceled, shall return to the status
of authorized but unissued preferred stock of no designated series, and shall
not be reissuable by the Company as Series E Preferred Stock.
8. Restrictions and Limitations.
(a) Corporate Securities Action. Except as expressly provided
herein or as required by law, so long as any shares of Series E Preferred Stock
remain outstanding, the Company shall not, and shall not permit any subsidiary
(which shall mean any corporation, association or other business entity for
which the Company and/or any of its other subsidiaries directly or indirectly
owns at the time more than fifty percent (50%) of the outstanding voting shares,
or more than 50% of the combined voting power of the outstanding voting shares,
of such corporation or entity), without the approval by vote or written consent
by the holders of at least a majority of the then outstanding shares of Series E
Preferred Stock, voting as a separate class, to take any action, or fail to take
any action, which would adversely affect the rights of the holders of Series E
Preferred Stock.
(b) Amendments to Charter. Without limiting the generality of
the preceding paragraph, the Company shall not amend its articles of
incorporation without the approval by the holders of at least a majority of the
then outstanding shares of Series E Preferred Stock if such amendment would:
(i) change the relative seniority rights of the
holders of Series E Preferred Stock as to the payment of dividends in relation
to the holders of any other capital stock of the Company, or create any other
class or series of capital stock entitled to seniority as to the payment of
dividends in relation to the holders of Series E Preferred Stock;
7
<PAGE>
(ii) reduce the amount payable to the holders of
Series E Preferred Stock upon the voluntary or involuntary liquidation,
dissolution or winding up of the Company, or change the relative seniority of
the liquidation preferences of the holders of Series E Preferred Stock to the
rights upon liquidation of the holders of other capital stock of the Company, or
change the dividend rights of the holders of Series E Preferred Stock;
(iii) cancel or modify the conversion rights of the
holders of Series E Preferred Stock provided for in Section 5 herein;
(iv) cancel or modify the rights of the holders of
the Series E Preferred Stock provided for in this Section 8.
9. No Dilution or Impairment. The Company shall not, by amendment of
its articles of incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms of the Series E Preferred Stock set forth herein, but shall at all
times in good faith assist in the carrying out of all such terms and in the
taking of all such actions as may be necessary or appropriate in order to
protect the rights of the holders of the Series E Preferred Stock against
dilution or other impairment. Without limiting the generality of the foregoing,
the Company (a) shall not increase the par value of any shares of stock
receivable on the conversion of the Series E Preferred Stock above the amount
payable therefor on such conversion, (b) shall take all such action as may be
necessary or appropriate in order that the Company may validly and legally issue
fully-paid and non-assessable shares of stock on the conversion of all Series E
Preferred Stock from time to time outstanding, and (c) shall not consolidate
with or merge into any other person or permit any such person to consolidate
with or merge into the Company (if the Company is not the surviving person),
unless such other person shall expressly assume in writing and will be bound by
all of the terms of the Series E Preferred Stock set forth herein.
10. Notices of Record Date. In the event of:
(a) any taking by the Company of a record of the holders of
any class of securities for the purpose of determining the holders thereof who
are entitled to receive any dividend or other distribution, or any right to
subscribe for, purchase or otherwise acquire any shares of stock of any class or
any other securities or property, or to receive any other right, or
(b) any capital reorganization of the Company, any
reclassification or recapitalization of the capital stock of the Company, any
merger of the Company, or any transfer of all or substantially all of the assets
of the Company to any other corporation, or any other entity or person, or
(c) any voluntary or involuntary dissolution, liquidation or
winding up of the Company, then and in each such event the Company shall mail or
cause to be mailed to each holder of Series E Preferred Stock a notice
specifying (i) the date on which any such record is to be taken for the purpose
of such dividend, distribution or right and a description of such dividend,
8
<PAGE>
distribution or right, (ii) the date on which any such reorganization,
reclassification, recapitalization, transfer, merger, dissolution, liquidation
or winding up is expected to become effective and (iii) the time, if any, that
is to be fixed, as to when the holders of record of Common Stock (or other
securities) shall be entitled to exchange their shares of Common Stock (or other
securities) for securities or other property deliverable upon such
reorganization, reclassification, recapitalization, transfer, merger,
dissolution, liquidation or winding up. Such notice shall be mailed at least ten
(10) business days prior to the date specified in such notice on which such
action is to be taken.
Signed on June 8, 1999
/s/ Mark Levy
--------------------------
Mark Levy, Vice President
9
Certificate of Designation of Series F
Convertible Preferred Stock
of
nStor Technologies, Inc.
It is certified that:
A. The name of the company is nStor Technologies, Inc., a Delaware
corporation (hereinafter the "Company").
B. The certificate of the incorporation of the Company, as amended,
authorizes the issuance of one million (1,000,000) shares of shares of Preferred
Stock, $.01 par value per share, and expressly vests in the Board of Directors
of the Company the authority provided therein to issue all of said shares in one
or more series and by resolution or resolutions to establish the designation and
number and to fix the relative rights and preferences of each series to be
issued.
C. The Board of Directors of the Company, pursuant to the authority
expressly vested in it, has adopted the following resolutions creating a class
of Series F Convertible Preferred Stock:
RESOLVED, that a portion of the one million (1,000,000) authorized
shares of Preferred Stock of the Company shall be designated as a separate
series possessing the rights and preferences set forth below:
1. Designation and Amount. The shares of such series shall have a par
value of $.01 per share and shall be designated as Series F Preferred Stock (the
"Series F Preferred Stock") and the number of shares constituting the Series F
Preferred Stock shall be Four Thousand Six Hundred and Fifty-Four (4,654). The
Company may issue fractional shares of Series F Preferred Stock. Each whole
share of Series F Preferred Stock shall have a stated value of One Thousand
Dollars ($1,000) (the "Stated Value"). For purposes of this Certificate of
Designation, the "Closing Date" shall mean the date on which the shares of
Series F Preferred Stock are initially issued.
2. Dividends. The holders of the outstanding shares of Series F
Preferred Stock shall be entitled to receive dividends at the following annual
rates, as permitted by law: eight percent (8%) during the period from the
Closing Date to the first anniversary of the Closing Date; nine percent (9%)
during the period from the first anniversary of the Closing Date to the second
anniversary of the Closing Date; and, ten percent (10%) during the period
following the second anniversary of the Closing Date. Such dividends shall be
payable quarterly. Such dividends shall be cumulative, whether or not there are
profits, surplus or other funds of the Company legally available for the payment
of dividends. If there shall not have been a sum sufficient for the payment
therefor set apart, the deficiency shall first be paid before any dividend or
other
<PAGE>
distribution shall be paid or declared and set apart with respect to any other
class of the Company's capital stock, now or hereafter outstanding. All accrued
dividends shall be immediately due and payable on the outstanding shares of
Series F Preferred Stock on the date such shares of Series F Preferred Stock are
converted into shares of common stock, par value $.05 per share, ("Common
Stock") in accordance with Section 5 hereof, which date shall be the "Conversion
Date". Dividends may be paid in cash or additional shares of Common Stock of the
Company, as may be determined, from time to time, in the sole discretion of the
Board of Directors.
3. Liquidation, Dissolution or Winding Up.
(a) In the event of any liquidation, dissolution or winding up
of the Company, whether voluntary or involuntary, before any distribution may be
made with respect to the Junior Securities (as hereinafter defined), holders of
each share of Series F Preferred Stock shall be entitled to be paid out of the
assets of the Company available for distribution to holders of the Company's
capital stock of all classes, whether such assets are capital, surplus, or
capital earnings, the Liquidation Preference (as hereinafter defined) with
respect to the Series F Preferred Stock.
(b) If the assets of the Company available for distribution to
its shareholders shall be insufficient to pay the holders of shares of Series F
Preferred Stock the full amount of the Liquidation Preference to which they
shall be entitled, the holders of shares of Series F Preferred Stock shall share
ratably in any distribution of assets according to the amounts which would be
payable with respect to the shares of Series F Preferred Stock held by them upon
such distribution if all amounts payable on or with respect to said shares were
paid in full and no dividend or distribution were to be paid with respect to any
Junior Securities then outstanding.
(c) After the payment of the Liquidation Preference shall have
been made in full to the holders of the Series F Preferred Stock or funds
necessary for such payment shall have been set aside by the Company in trust for
the account of holders of the Series F Preferred Stock so as to be available for
such payments, the holders of the Series F Preferred Stock shall be entitled to
no further participation in the distribution of the assets of the Company, and
the remaining assets of the Company legally available for distribution to its
shareholders shall be distributed among the holders of other classes of
securities of the Company in accordance with their respective terms.
(d) The purchase or redemption by the Company of stock of any
class, in any manner permitted by law, shall not, for the purpose hereof, be
regarded as a liquidation, dissolution or winding up of the Company. Neither the
merger or consolidation of the Company with and into any other entity nor the
sale or transfer by the Company of less than substantially all of its assets
shall, for the purposes hereof, be deemed a liquidation, dissolution or winding
up of the Company.
(e) For purposes of this Section, the following terms shall
have the following meanings:
2
<PAGE>
(i) "Junior Securities" shall mean (a) the Common
Stock, (b) the Company's Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock and Series E Preferred Stock,
and (c) any class or series of capital stock of the Company hereafter created
(unless, with the consent of the Holders of a majority of the outstanding shares
of Series F Preferred Stock obtained in accordance with Section 8 hereof, such
class or series of capital stock specifically, by its terms, ranks senior to or
pari passu with the Series F Preferred Stock).
(ii) "Liquidation Preference" with respect to a Share
of Series F Preferred Stock means an amount equal to the Stated Value thereof
plus any accrued and unpaid dividends and any amounts that may be due from the
Company with respect thereto pursuant to this Certificate of Designation.
4. Voting Power. Except as otherwise expressly provided in Section 8
hereof, or as required by law, each holder of Series F Preferred Stock shall be
entitled to vote on all matters and shall be entitled to that number of votes
equal to the largest number of shares of Common Stock into which such holder's
shares of Series F Preferred Stock could be converted, pursuant to the
provisions of Section 5 hereof, at the record date for the determination of
shareholders entitled to vote on such matter or, if no such record date is
established, at the date such vote is taken or any written consent of
shareholders is solicited. Except as otherwise expressly provided herein or as
required by law, the holders of shares of Series F Preferred Stock and Common
Stock shall vote together as a single class on all matters. The holders of the
Common Stock shall not take any action by written consent without the prior
written consent of the holders of a majority of the Series F Preferred Stock.
5. Conversion Rights for the Series F Preferred Stock. The holders of
Series F Preferred Stock shall have conversion rights as follows ("Conversion
Rights"):
(a) Right to Convert. Each holder of Series F Preferred Stock
shall be entitled (at the times and in the amounts set forth below) to convert,
in whole or in part, in multiples of one hundred (100) shares, shares of Series
F Preferred Stock, at the option of the holder.
(b) Conversion Rate. From and after the date of issuance, each
share of Series F Preferred Stock may be converted into Three Hundred
Thirty-Three and One-Third (333 1/3) shares of fully-paid and non-assessable
shares of Common Stock.
(c) Stock Reclassifications; Stock Splits, Combinations and
Dividends. If the Common Stock issuable upon the conversion of the Series F
Preferred Stock shall be changed into the same or different number of shares of
any class or classes of stock, whether by reclassification, stock split, stock
dividend, or similar event, then and in each such event, the holder of each
share of Series F Preferred Stock shall have the right thereafter to convert
such share into the kind and amount of shares of stock and other securities and
property receivable upon such capital reorganization, reclassification or other
change which such holder would have received had its shares of Series F
Preferred Stock been converted immediately prior to such capital reorganization,
reclassification or other change.
3
<PAGE>
(d) Capital Reorganization, Merger or Sale of Assets. If at
any time or from time to time there shall be a capital reorganization of the
Common Stock (other than a subdivision, combination, reclassification or
exchange of shares provided for in Section 5(d) above) or a merger or
consolidation of the Company with or into another corporation, or the sale of
all or substantially all of the Company's properties and assets to any other
person, or any transaction or series of related transactions in which more than
fifty percent (50%) of the outstanding voting securities of the Company (on an
as converted basis) is sold or assigned (any of which events is herein referred
to as a "Reorganization"), then as a part of such Reorganization, provision
shall be made so that the holders of the Series F Preferred Stock shall
thereafter be entitled to receive upon conversion of the Series F Preferred
Stock, the number of shares of stock or other securities or property of the
Company, or of the successor corporation resulting from such Reorganization, to
which such holder would have been entitled if such holder had converted its
shares of Series F Preferred Stock immediately prior to such Reorganization. In
any such case, appropriate adjustment shall be made in the application of the
provisions of this Section 5 with respect to the rights of the holders of the
Series F Preferred Stock after the Reorganization, to the end that the
provisions of this Section 5 (including adjustment of the number of shares
issuable upon conversion of the Series F Preferred Stock) shall be applicable
after that event in as nearly equivalent a manner as may be practicable.
(e) Issuance of Certain Common Stock Below Conversion
Price.
(i) In case the Company, after the date hereof, shall
issue or sell shares of Common Stock at a price of less than $3.00 per share of
Common Stock (other than upon exercise of options to purchase common stock
issued to employees of the Company pursuant to an employee stock option or
similar plan or upon exercise or conversion of securities that are convertible
or exchangeable into Common Stock and that are outstanding as of June 1, 1999),
then in each case the number of shares of Common Stock issuable upon the
conversion of all Series F Preferred Stock shall be increased in a manner
determined by multiplying the number of shares of Common Stock theretofore
issuable upon the conversion of all of the Series F Preferred Stock then
outstanding by a fraction, of which the numerator shall be the number of shares
of Common Stock outstanding immediately prior to the sale or issuance plus the
number of additional shares of Common Stock offered for sale and of which the
denominator shall be the number of shares of Common Stock outstanding
immediately prior to the sale or issuance plus the number of shares of Common
Stock which the aggregate consideration to be received by the Company in
connection with such sale or issuance would purchase at $3.00 per share.
(ii) In case the Company shall issue or sell shares
of Common Stock in exchange for property other than cash or its equivalent, then
in determining the "price per share of Common Stock" and the "consideration"
receivable by or payable to the Company for purposes of this Section 5(e), the
Board of Directors of the Company shall determine, in good faith, the fair value
of such property.
(iii) Any increase of the number of shares of Common
Stock issuable upon conversion of the Series F Preferred Stock then outstanding
made pursuant to this Section 5(e) shall be allocated among such shares of
Series F Preferred Stock on a pro rata basis.
4
<PAGE>
(f) Exercise of Conversion Rights.
(i) Holders of Series F Preferred Stock may exercise
their right to convert the Series F Preferred Stock by telecopying an executed
and completed notice (a "Notice of Conversion") to the Company and delivering
the original Notice of Conversion and the certificate representing the Series F
Preferred Stock by express courier. Each business day on which a Notice of
Conversion is telecopied to and received by the Company along with a copy of the
originally executed Series F Preferred Stock certificates in accordance with the
provisions hereof shall be deemed a "Conversion Date." For purposes hereof, the
term "business day" refers the hours between 9:00 a.m. and 5:00 p.m. on any day
on which banks are open for business in Palm Beach County, Florida. Provided
that the Company has received the original Notice of Conversion and Series F
Preferred Stock certificate being so converted, the Company will transmit, or
instruct its transfer agent to transmit, the certificates representing shares of
Common Stock issuable upon conversion of any share of Series F Preferred Stock
(together with the certificates representing the Series F Preferred Stock not so
converted) to the holder thereof via express courier, by electronic transfer or
otherwise, three business days after the receipt by the Company of the original
Series F Preferred Stock Certificate representing the shares being converted. In
addition to any other remedies which may be available to the holders of shares
of Series F Preferred Stock, in the event that the Company fails to deliver, or
has failed to contact its transfer agent to deliver, such shares of Common Stock
within such three (3) business day period, the holder will be entitled to revoke
the relevant Notice of Conversion by delivering a notice to such effect to the
Company whereupon the Company and the holder shall each be restored to their
respective positions immediately prior to delivery of such Notice of Conversion.
The Notice of Conversion and Series F Preferred Stock certificates representing
the portion of the Series F Preferred Stock converted shall be delivered to the
following address:
nSTOR TECHNOLOGIES, INC.
100 Century Blvd.
West Palm Beach, FL 33417
Fax: (561) 640-3160
(g) Lost or Stolen Certificates. Upon receipt by the Company
of evidence of the loss, theft, destruction or mutilation of any Series F
Preferred Stock certificate(s), and (in the case of loss, theft or destruction)
of indemnity or security reasonably satisfactory to the Company, and upon the
cancellation of the Series F Preferred Stock certificate(s), if mutilated, the
Company shall execute and deliver new certificates for Series F Preferred Stock
of like tenure and date. However, the Company shall not be obligated to reissue
such lost or stolen certificates for shares of Series F Preferred Stock if the
holder contemporaneously requests the Company to convert such Series F Preferred
Stock into Common Stock.
(h) Fractional Shares. The Company may, if it so elects, issue
fractional shares of Common Stock upon the conversion of shares of Series F
Preferred Stock. If the Company does not elect to issue fractional shares, the
Company shall pay to the holder of the shares of Series F Preferred Stock which
were converted a cash adjustment in respect of such fractional shares in an
amount equal to the same fraction of the market price per share of the Common
Stock
5
<PAGE>
(as determined in a reasonable manner prescribed by the Board of Directors) as
of the close of business on the Conversion Date. The determination as to whether
any fractional shares are issuable shall be based upon the total number of
shares of Series F Preferred Stock being converted at any one time by any holder
thereof, not upon each share of Series F Preferred Stock being converted.
(i) Partial Conversion. In the event some but not all of the
shares of Series F Preferred Stock represented by a certificate or certificates
surrendered by a holder are converted, the Company shall execute and deliver to
or to the order of the holder, at the expense of the Company, a new certificate
representing the number of shares of Series F Preferred Stock which were not
converted.
(j) Reservation of Common Stock. The Company shall at all
times reserve and keep available out of its authorized but unissued shares of
Common Stock, solely for the purpose of effecting the conversion of the shares
of the Series F Preferred Stock, such number of its shares of Common Stock as
shall from time to time be sufficient or as may be available to effect the
conversion of all outstanding shares of the Series F Preferred Stock, and if at
any time the number of authorized but unissued shares of Common Stock shall not
be sufficient to effect the conversion of all the then outstanding shares of the
Series F Preferred Stock, the Company shall use its best efforts to take such
corporate action as may be necessary to increase its authorized but unissued
shares of Common Stock to such number of shares as shall be sufficient for such
purpose.
6. Redemption.
(a) Optional Redemption by the Company During the Eight Months
After the Closing Date. Subject to the limitations contained in Section 6(e)
below, the Company may, at its option, during the period ending on the eighth
monthly anniversary of the Closing Date (the "Initial Redemption Period"), upon
(20) business days' notice to the Holders (a "Notice of Optional Redemption"),
redeem all (but not less than all) of the outstanding shares of Series F
Preferred Stock for cash, out of funds legally available therefor, at a price
equal to One Hundred Five Percent (105%) of the Stated Value of such shares of
Series F Preferred Stock, plus any accrued but unpaid dividends due thereon
prior to the redemption date. Nothing in this Section shall prohibit conversions
of the Series F Preferred Stock otherwise permitted pursuant to the terms of
this Certificate of Designation during the pendency of any Notice of Optional
Redemption by the Company hereunder.
(b) Optional Redemption by the Company After the Initial
Redemption Period. Subject to the limitations contained in Section 6(e) below,
the Company may, at its option, during the period beginning on the eighth
monthly anniversary of the Closing Date and any time thereafter, upon (20)
business days' notice to the Holders, redeem all (but not less than all) of the
outstanding shares of Series F Preferred Stock for cash out of funds legally
available therefor, at a price equal to One Hundred Ten Percent (110%) of the
Stated Value of such shares of Series F Preferred Stock, plus any accrued but
unpaid dividends due thereon prior to the redemption date. Nothing in this
Section shall prohibit conversions of the Series F Preferred Stock otherwise
permitted pursuant to the terms of this Certificate of Designation during the
pendency of any Notice of Optional Redemption by the Company hereunder.
6
<PAGE>
(c) Mandatory Redemption by the Company in the Event of a
Public Offering. In the event that the Company registers any of its common stock
(a "Registration"), on its own behalf, under the Securities Act of 1933, as
amended (the "Securities Act") (other than a transaction described under Rule
145 of the Securities Act, a transaction registering securities convertible into
common stock or pursuant to Forms S-4, S-8 or their successor forms), the
Company shall (a "Mandatory Redemption"), upon (20) business days' notice to the
Holders (a "Notice of Mandatory Redemption"), redeem all (but not less than all)
of the outstanding shares of Series F Preferred Stock for cash out of funds
legally available therefor, at a price equal to (i) during the Initial
Redemption Period, One Hundred Five Percent (105%) of the Stated Value of such
shares of Series F Preferred Stock, plus any accrued but unpaid dividends due
thereon prior to the redemption date, and (ii) after the Initial Redemption
Period, One Hundred Ten Percent (110%) of the Stated Value of such shares of
Series F Preferred Stock, plus any accrued but unpaid dividends due thereon
prior to the redemption date. Nothing in this Section shall prohibit conversions
of the Series F Preferred Stock otherwise permitted pursuant to the terms of
this Certificate of Designation during the pendency of any Notice of Mandatory
Redemption by the Company hereunder.
(d) Participation in Public Offering. In the event that a
Holder, upon receipt of a Notice of Mandatory Redemption, elects to convert all
or any portion of its shares of Series F Preferred Stock, such Holder shall be
entitled to include the shares of Common Stock issuable upon such conversion in
the Registration. In the event that a Holder, upon receipt of a Notice of
Mandatory Redemption, elects to convert all or any portion of its shares of
Series F Preferred Stock, but elects not to include such shares in the
Registration, such Holder shall agree to execute such lockup agreement as the
managing underwriter for the Registration may reasonably require.
(e) Capital Impairment. In the event that Section 160 of the
Delaware General Business Corporation Law (the "DGCL") would be violated by the
redemption of any shares of Series F Preferred Stock that are otherwise subject
to redemption pursuant to this Section 6, the Company: (i) will redeem the
greatest number of shares of Series F Preferred Stock possible without violation
of said Section; (ii) the Company thereafter shall use its best efforts to take
all necessary steps permitted pursuant to this Certificate of Designation and
the agreements entered into in connection with the issuance of the Series F
Preferred Stock pursuant hereto in order to adjust its capital structure in
order to allow further redemptions without violation of said Section; and (iii)
from time to time thereafter as promptly as possible the Company shall redeem
shares of the Series F Preferred Stock at the request of the Holders to the
greatest extent possible without causing a violation of the DGCL.
7. No Reissuance of Series F Preferred Stock. Any share or shares of
Series F Preferred Stock acquired by the Company by reason of redemption,
purchase, conversion or otherwise shall be canceled, shall return to the status
of authorized but unissued preferred stock of no designated series, and shall
not be reissuable by the Company as Series F Preferred Stock.
8. Restrictions and Limitations.
(a) Corporate Securities Action. Except as expressly provided
herein or as required by law, so long as any shares of Series F Preferred Stock
remain outstanding, the Company shall not, and shall not permit any subsidiary
(which shall mean any corporation, association or other business entity for
which the Company and/or any of its other subsidiaries
7
<PAGE>
directly or indirectly owns at the time more than fifty percent (50%) of the
outstanding voting shares, or more than 50% of the combined voting power of the
outstanding voting shares, of such corporation or entity), without the approval
by vote or written consent by the holders of at least a majority of the then
outstanding shares of Series F Preferred Stock, voting as a separate class, to
take any action, or fail to take any action, which would adversely affect the
rights of the holders of Series F Preferred Stock.
(b) Amendments to Charter. Without limiting the generality of
the preceding paragraph, the Company shall not amend its articles of
incorporation without the approval by the holders of at least a majority of the
then outstanding shares of Series F Preferred Stock if such amendment would:
(i) change the relative seniority rights of the
holders of Series F Preferred Stock as to the payment of dividends in relation
to the holders of any other capital stock of the Company, or create any other
class or series of capital stock entitled to seniority as to the payment of
dividends in relation to the holders of Series F Preferred Stock;
(ii) reduce the amount payable to the holders of
Series F Preferred Stock upon the voluntary or involuntary liquidation,
dissolution or winding up of the Company, or change the relative seniority of
the liquidation preferences of the holders of Series F Preferred Stock to the
rights upon liquidation of the holders of other capital stock of the Company, or
change the dividend rights of the holders of Series F Preferred Stock;
(iii) cancel or modify the conversion rights of the
holders of Series F Preferred Stock provided for in Section 5 herein;
(iv) cancel or modify the rights of the holders of
the Series F Preferred Stock provided for in this Section 8.
9. No Dilution or Impairment. The Company shall not, by amendment of
its articles of incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms of the Series F Preferred Stock set forth herein, but shall at all
times in good faith assist in the carrying out of all such terms and in the
taking of all such actions as may be necessary or appropriate in order to
protect the rights of the holders of the Series F Preferred Stock against
dilution or other impairment. Without limiting the generality of the foregoing,
the Company (a) shall not increase the par value of any shares of stock
receivable on the conversion of the Series F Preferred Stock above the amount
payable therefor on such conversion, (b) shall take all such action as may be
necessary or appropriate in order that the Company may validly and legally issue
fully-paid and non-assessable shares of stock on the conversion of all Series F
Preferred Stock from time to time outstanding, and (c) shall not
8
<PAGE>
consolidate with or merge into any other person or permit any such person to
consolidate with or merge into the Company (if the Company is not the surviving
person), unless such other person shall expressly assume in writing and will be
bound by all of the terms of the Series F Preferred Stock set forth herein.
10. Notices of Record Date. In the event of:
(a) any taking by the Company of a record of the holders of
any class of securities for the purpose of determining the holders thereof who
are entitled to receive any dividend or other distribution, or any right to
subscribe for, purchase or otherwise acquire any shares of stock of any class or
any other securities or property, or to receive any other right, or
(b) any capital reorganization of the Company, any
reclassification or recapitalization of the capital stock of the Company, any
merger of the Company, or any transfer of all or substantially all of the assets
of the Company to any other corporation, or any other entity or person, or
(c) any voluntary or involuntary dissolution, liquidation or
winding up of the Company, then and in each such event the Company shall mail or
cause to be mailed to each holder of Series F Preferred Stock a notice
specifying (i) the date on which any such record is to be taken for the purpose
of such dividend, distribution or right and a description of such dividend,
distribution or right, (ii) the date on which any such reorganization,
reclassification, recapitalization, transfer, merger, dissolution, liquidation
or winding up is expected to become effective and (iii) the time, if any, that
is to be fixed, as to when the holders of record of Common Stock (or other
securities) shall be entitled to exchange their shares of Common Stock (or other
securities) for securities or other property deliverable upon such
reorganization, reclassification, recapitalization, transfer, merger,
dissolution, liquidation or winding up. Such notice shall be mailed at least ten
(10) business days prior to the date specified in such notice on which such
action is to be taken.
Signed on June 8, 1999
/s/ Mark Levy
-------------------------
Mark Levy, Vice President
9
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER ANY STATE
SECURITIES LAWS, AND THE COMPANY HAS RELIED UPON AN EXEMPTION TO THE
REGISTRATION REQUIREMENT UNDER THE ACT FOR THE SALE OF THE SECURITIES
REPRESENTED BY THIS CERTIFICATE TO ITS HOLDER. THEREFORE, THE SECURITIES
REPRESENTED BY THIS CERTIFICATE ARE RESTRICTED SECURITIES AND MAY NOT BE SOLD OR
TRANSFERRED TO ANY THIRD PARTY WITHOUT EITHER BEING REGISTERED UNDER THE ACT OR
UPON RECEIPT OF AN OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY THAT
REGISTRATION IS NOT REQUIRED UNDER THE ACT.
DATED: June 8, 1999 NO. __
WARRANT
nSTOR TECHNOLOGIES, INC.
Warrant to Purchase 155,133 Shares
of Common Stock, par value $.05 per share
VOID AFTER 5:00 P.M., EASTERN STANDARD TIME
ON JUNE 8, 2002
This certifies that, for value received, W. David Sykes ("Sykes"), or
registered assigns (collectively with Sykes, the "Holder"), is entitled to
purchase from nStor Technologies, Inc., a Delaware corporation (the "Company"),
One Hundred Fifty Five Thousand One Hundred Thirty- Three (155,133) 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 $3.30 per Share (the
"Exercise Price") at any time from and after June 8, 1999 to and including 5:00
p.m. Eastern Standard Time on June 8, 2002 (the "Exercise Period"), subject to
the terms, conditions and adjustments set forth in this Warrant (the "Warrant").
1. Exercise of Warrants.
(a) Cash Exercise. 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
1
<PAGE>
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.
(b) Net Issue Exercise. In lieu of exercising this Warrant
pursuant to Section 1(a), this Warrant may be exercised by the Holder during the
Exercise Period upon presentation and surrender hereof with the attached
Purchase Form duly exercised and marked to reflect Net Issue Exercise and
specifying the number of Shares to be purchased, at the Office of the Company
located at 100 Century Boulevard, West Palm Beach, FL 33417. The Company agrees
that such Shares shall be deemed to be issued to the Holder as the record holder
of such Shares as of the close of business on the date on which this Warrant and
the related Purchase Form shall have been surrendered as aforesaid, and such
date shall be deemed the Exercise Date for all purposes hereunder. Upon such
exercise, the Holder shall be entitled to receive Shares equal to the value of
this Warrant (or the portion thereof being canceled) by surrender of this
Warrant and the related Purchase Form to the Company as aforesaid, in which
event the Company shall issue the Holder a number of Shares computed as of the
deemed Exercise Date using the following formula:
X = Y(A-B)
A
where: X = the number of Shares to be issued to
the Holder under this Section 1(b)
Y = the number of Shares otherwise
purchasable under this Warrant (as of
the date of calculation)
A = the Current Market Price on the date
prior to the Exercise Date
B = the Exercise Price (as adjusted to
the day prior to the deemed Exercise
Date)
2
<PAGE>
and for purpose of this Section 1(b), the "Current Market
Price" shall be determined as follows:
(c) if the security at issue is listed on a national
securities exchange or admitted to unlisted trading privileges on such an
exchange or quoted on either the National Market System or the Small Cap Market
of the automated quotation service operated by Nasdaq, Inc. ("NASDAQ"), the
Current Market Price shall be the last reported sale price of that security on
such exchange or system on the day for which the Current Market Price is to be
determined or, if no such sale is made on such day, the average of the highest
closing bid and lowest asked price for such day on such exchange or system; or
(d) if the security at issue is not so listed or quoted or
admitted to unlisted trading privileges and bid and asked prices are not
reported, the Current Market Price shall be calculated using the following
formula:
L = M/N
where: L = the Current Market Price
M = the revenue for the Company in the
most recently completed fiscal year
N = the total outstanding shares of
Common Stock of the Company as of the
deemed Exercise Date
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 canceled.
Conditions to the transfer of this Warrant or any portion thereof shall be that
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
<PAGE>
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. 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 will at no time close its shareholder books or records in any manner
which interferes with the timely exercise of this Warrant.
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 Articles 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.
4
<PAGE>
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 reorganization,
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.
5
<PAGE>
(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 8 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
6
<PAGE>
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. Survival. The various rights and obligations of the Holder and of
the Company as set forth in Sections 3, 4 and 5 hereof shall survive the
exercise of this Warrant and the surrender of this instrument upon such
exercise.
8. 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.
9. 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.
10. 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.
7
<PAGE>
(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 8th day of June, 1999.
ATTEST: nSTOR TECHNOLOGIES, INC.
By: /s/ Donn Beloff By: /s/ Mark Levy
--------------- -------------
Name: Donn Beloff Mark Levy
------------- Vice President
Title: Counsel
------------
8
<PAGE>
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:_________________
9
<PAGE>
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
(a) herewith tenders payment for of the Shares to the order of
nStor Technologies, Inc. in the amount of $ in accordance with the terms of this
Warrant, and/or
(b) herewith tenders this Warrant for of the Shares pursuant
to the Net Issue Exercise provisions of Section 1(b) of this Warrant.
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
_______________________________________
Signature
10
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER ANY STATE
SECURITIES LAWS, AND THE COMPANY HAS RELIED UPON AN EXEMPTION TO THE
REGISTRATION REQUIREMENT UNDER THE ACT FOR THE SALE OF THE SECURITIES
REPRESENTED BY THIS CERTIFICATE TO ITS HOLDER. THEREFORE, THE SECURITIES
REPRESENTED BY THIS CERTIFICATE ARE RESTRICTED SECURITIES AND MAY NOT BE SOLD OR
TRANSFERRED TO ANY THIRD PARTY WITHOUT EITHER BEING REGISTERED UNDER THE ACT OR
UPON RECEIPT OF AN OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY THAT
REGISTRATION IS NOT REQUIRED UNDER THE ACT.
DATED: June 8, 1999 NO. __
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 JUNE 8, 2002
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"), ______________________________ (__________) 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 $3.30 per Share (the
"Exercise Price") at any time from and after June 8, 1999 to and including 5:00
p.m. Eastern Standard Time on June 8, 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
1
<PAGE>
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 canceled.
Conditions to the transfer of this Warrant or any portion thereof shall be that
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.
2
<PAGE>
4. Covenants and Warranties of the Company. 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 will at no time close its shareholder books or records in any manner
which interferes with the timely exercise of this Warrant.
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 Articles 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
3
<PAGE>
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 reorganization,
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 8 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.
4
<PAGE>
(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).
5
<PAGE>
(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. Survival. The various rights and obligations of the Holder and of
the Company as set forth in Sections 3, 4, and 5 hereof shall survive the
exercise of this Warrant and the surrender of this instrument upon such
exercise.
8. 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.
9. 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.
10. 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
6
<PAGE>
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 8th day of June, 1999.
ATTEST: nSTOR TECHNOLOGIES, INC.
By:______________________ By:______________________
Name:____________________ Mark Levy
Title:___________________ Vice President
7
<PAGE>
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:_________________
8
<PAGE>
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
9
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
("THE ACT"), NOR UNDER ANY STATE SECURITIES LAW AND MAY NOT BE PLEDGED, SOLD,
ASSIGNED OR TRANSFERRED UNTIL (i) A REGISTRATION STATEMENT WITH RESPECT THERETO
IS EFFECTIVE UNDER THE ACT AND ANY APPLICABLE STATE SECURITIES LAW OR (ii) THE
COMPANY RECEIVES AN OPINION OF COUNSEL TO THE HOLDER OF THIS NOTE, WHICH COUNSEL
IS SATISFACTORY TO THE COMPANY, THAT THE NOTE MAY BE PLEDGED, SOLD, ASSIGNED OR
TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR
APPLICABLE STATE SECURITIES LAW.
THIS NOTE IS NEGOTIABLE AND SUBORDINATED TO ANY AND ALL DEBTS OF THE COMPANY AS
PROVIDED BELOW.
NSTOR TECHNOLOGIES, INC.
(a Delaware corporation)
9.5% Subordinated Note
Amount: $292,740 Dated: June 8, 1999
NSTOR TECHNOLOGIES, INC., a Delaware corporation ("Company"), for value
received, hereby promises to pay to the Sykes Children's Trust of 1993 or to its
order or to such persons as it may designate from time to time ("Holder") in
lawful money of the United States of America, upon Holder's presentation and
surrender of this 9.5% Subordinated Note ("Note") at the principal office of the
Company: (i) the principal sum of Two Hundred Ninety Two Thousand Seven Hundred
Forty Dollars ($292,740.00) on June 17, 2004, 10:00 a.m., local time
("Maturity"), and (ii) interest on the unpaid principal of this Note at the rate
of nine and one-half percent (9.5%) per annum, payable monthly.
At the option of the Company, any payment by the Company required
hereunder may be made by check mailed to the Holder at the last address for the
Holder appearing on the records of the Company. This Note may be prepaid in
whole or part without penalty, at any time and from time to time, by the Company
prior to Maturity.
1. No Avoidance. The Company shall not, by amendment of its Articles of
Incorporation or through any reorganization, transfer of assets, consolidation,
merger, dissolution, issuance or sale of securities or any other voluntary
action, nor shall the Holder by any action, avoid or seek to avoid the
performance of any of the provisions of this Note.
2. Application of Payments. All payments received shall be applied
first to charges other than interest and principal, if any, owing hereunder,
then to accrued interest then due, then
1
<PAGE>
to principal, except that, after the occurrence and during the continuation of
any default under this Note, all amounts received shall be applied in such order
as Holder, in its sole discretion, may elect.
3. No Waiver. The acceptance by Holder of any payment under this Note
after the date that such payment is due shall not constitute a waiver of the
right to require prompt payment when due of future or succeeding payments or to
declare a default as herein provided for any failure to so pay. The acceptance
by Holder of the payment of a portion of any installment at any time that such
installment is due and payable in its entirety shall neither cure nor excuse the
default caused by the failure to pay the whole of such installment and shall not
constitute a waiver of Holder's right to require full payment when due of all
future or succeeding installments.
4. Subordination. Indebtedness evidenced by this Note shall be
subordinate in interest, and in right of payment as to principal and accrued
interest, to the payment of any and all "Senior Indebtedness." "Senior
Indebtedness" shall mean: (i) all indebtedness owed to any lender, whether or
not secured, including, without limitation all indebtedness under revolving
lines of credit and term loans; (ii) all obligations to reimburse any bank or
other person in respect of amounts paid under letters of credit, acceptance or
other similar instruments; (iii) purchase money financing incurred in connection
with the purchase by the Company of goods, fixtures, equipment or inventory;
(iv) capital lease obligations; (v) liens prior in interest to this Note by
operation of law; and (vi) all deferrals, renewals, extensions and refundings
of, and amendments, modifications and supplements to any of the Senior
Indebtedness described above.
5. Default. In the event that the Company: (i) fails to make any
payment of principal or interest hereunder when due and such default shall
continue for thirty (30) days after written notice thereof has been delivered to
the Company; (ii) files a petition or is subject to proceedings for protection
under any bankruptcy, receivership, reorganization or insolvency laws; (iii)
makes a general assignment of all or substantially all of its assets for the
benefit of its creditors or takes any corporate action in furtherance of the
foregoing; (iv) is the subject of an involuntary petition (unless such petition
is dismissed or discharged within (60) days) under any bankruptcy statute nor or
hereafter in effect; (v) has a trustee or receiver appointed for the Company,
its assets or a substantial portion of its assets; (vi) is adjudicated by a
court of competent jurisdiction to be insolvent or bankrupt; or (vii) fails to
observe any of the covenants or agreements on the part of the Company contained
in this Note continuing (without being waived or cured) for a period of thirty
(30) days after receipt from Holder of written notice of such failure (unless
the issue of whether such failure has been cured is being contested in good
faith by the Company); then the Holder may, by written notice to the Company,
declare the outstanding principal amount of this Note to be immediately due and
payable, whereupon the outstanding principal amount hereof shall become and be
immediately due and payable, along with any accrued but unpaid interest.
Any principal repayment or interest payment on this Note which is not paid when
due, whether at stated maturity, by acceleration or otherwise, shall bear
interest at twelve percent (12%) per annum compounded annually, or the maximum
rate permissible by law (which under the laws of the State of Florida shall be
deemed to be the laws relating to permissible rates of interest on commercial
loans), whichever is less.
2
<PAGE>
6. Negotiability. This Note is negotiable. It may be sold, assigned or
transferred by the Holder without the prior written consent of the Board of
Directors of the Company. Upon the death of the Holder, the Holder's
administrator, executor, heir or legatee shall have, upon written notice to the
Company, all rights and interests of the Holder in this Note. Any sale,
assignment, transfer or succession (due to death of the Holder) shall be made in
compliance with all applicable Federal and state securities laws, and upon any
such event, the Company may issue a substitute Note in the name of the new
Holder and representing the then outstanding principal and unpaid accrued
interest.
7. Severability. In case any provision of this Note is held invalid,
illegal or unenforceable by a court of competent jurisdiction, the validity,
legality and enforceability of the remaining provisions shall not in any way be
effected or impaired thereby.
8. Choice of Law; Venue and Jurisdiction; Legal Proceedings. This Note
shall be governed by and construed in accordance with the laws of the State of
Florida, without reference to choice of law principles. In any suit, action or
proceeding arising out of or in connection with this Note, the prevailing party
shall be entitled to an award of the reasonable attorneys' fees and
disbursements incurred by such party in connection therewith.
9. Attorneys' Fees and Costs. In the event it becomes necessary for
Holder to utilize legal counsel for the enforcement of this Note or any of its
terms, and is successful in such enforcement by legal proceedings or otherwise,
Holder shall be reimbursed immediately by the Company for reasonably-incurred
attorneys' fees and other costs and expenses.
10. Waivers. The makers, endorsers, guarantors and sureties of this
Note hereby waive diligence, demand, presentment, notice of non-payment or
dishonor, protest and notice of protest, and expressly agree that the time for
performance of any obligation under this Note may be extended from time to time,
consent to the release of any party liable hereon or herefor, and waive the
right to plead any and all statutes of limitations as a defense to any demand on
this Note, or any guaranty thereof, or to any agreement to pay the same, to the
full extent permissible by law.
11. Business Day. If any interest payment date or the Maturity date
under this Note shall not be a business day in the State of Florida, payment may
be made on the next succeeding day that is a business day, and shall be deemed
hereunder as made on such interest payment date or Maturity date,
notwithstanding any other provisions contained in this Note.
12. Notices. Any notice, request or other communication to either Party
by the other hereunder shall be deemed given on the earlier of the date (i)
actually received and acknowledged; (ii) three (3) days after its mailing by
certified or registered mail, return receipt requested, posatge prepaid; or
(iii) on the business day immediately following its delivery (evidenced by
receipt) to any reputable overnight carrier or transmission via facsimile in
each case addressed to the Party for which it is intended at the address (or
facsimile transmission number) set forth in this Agreement. The place to which
notices are to be given to any Party may be changed from time to time by such
Party by like notice to the other. Notices shall be addressed as follows:
3
<PAGE>
If to the Company:
H. Irwin Levy, Chairman
nStor Technologies, Inc.
100 Century Boulevard
West Palm Beach, Florida 33417
Fax: (561) 640-3160
and
Lawrence Steffann, President
nStor Technologies, Inc,
450 Technology Park Boulevard
Lake Mary, Florida 32746
Fax: (407) 829-3627
With a copy to:
Akerman Senterfitt & Eidson, P.A.
450 East Las Olas Boulevard
Suite 950
Fort Lauderdale, Florida 33301
Attn: Donn Beloff, Esq.
Fax: (954) 463-2224
If to Holder:
W. David Sykes
c/o Andataco, Inc.
10140 Mesa Rim Road
San Diego, CA 92121
Fax: (619) 453-2676
With a copy to:
Luce, Forward, Hamilton & Scripps LLP
600 West Broadway, Suite 2600
San Diego,California 92101
Attn: Dennis J. Doucette, Esq.
Fax: (619) 232-8311
13. Modification. This Note represents the entire understanding of the
parties hereto relating to the subject matter hereof, and supersedes any and all
other prior agreements between the parties. The terms and provisions of this
Note cannot be modified or amended orally or by
4
<PAGE>
course of dealing or conduct, or in any other manner, except in a writing signed
by the party against whom enforcement is sought.
14. Binding Effect. This Note shall be binding on and inure to the
benefit of the respective parties hereto and their successors and assigns.
15. Captions. Section captions are provided for the convenience of the
parties and are not intended to affect the interpretation, performance or
enforcement of this Note.
16. Compliance With Law. It is the responsibility of the Holder ensure
that all payments received by the Holder comply with all tax, securities and
other applicable laws, rules, and regulations of all applicable authorities, and
to provide the Company with any written consents or other documents necessary
for compliance with such laws, rules and regulations.
IN WITNESS WHEREOF, the Company has caused this Note to be signed by
its authorized officer as of this 8th day of June, 1999.
NSTOR TECHNOLOGIES, INC.,
a Delaware corporation
By: /s/ Michael L. Wise
--------------------------
Michael L. Wise
Vice President
5
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
("THE ACT"), NOR UNDER ANY STATE SECURITIES LAW AND MAY NOT BE PLEDGED, SOLD,
ASSIGNED OR TRANSFERRED UNTIL (i) A REGISTRATION STATEMENT WITH RESPECT THERETO
IS EFFECTIVE UNDER THE ACT AND ANY APPLICABLE STATE SECURITIES LAW OR (ii) THE
COMPANY RECEIVES AN OPINION OF COUNSEL TO THE HOLDER OF THIS NOTE, WHICH COUNSEL
IS SATISFACTORY TO THE COMPANY, THAT THE NOTE MAY BE PLEDGED, SOLD, ASSIGNED OR
TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR
APPLICABLE STATE SECURITIES LAW.
THIS NOTE IS NEGOTIABLE AND SUBORDINATED TO ANY AND ALL DEBTS OF THE COMPANY AS
PROVIDED BELOW.
NSTOR TECHNOLOGIES, INC.
(a Delaware corporation)
9.5% Subordinated Note
Amount: $4,807,260 Dated: June 8, 1999
NSTOR TECHNOLOGIES, INC., a Delaware corporation ("Company"), for value
received, hereby promises to pay to the Sykes Family Trust or to its order or to
such persons as it may designate from time to time ("Holder") in lawful money of
the United States of America, upon Holder's presentation and surrender of this
9.5% Subordinated Note ("Note") at the principal office of the Company: (i) the
principal sum of Four Million Eight Hundred Seven Thousand Two Hundred Sixty
Dollars ($4,807,260.00) on June 17, 2004, 10:00 a.m., local time ("Maturity"),
and (ii) interest on the unpaid principal of this Note at the rate of nine and
one-half percent (9.5%) per annum, payable monthly.
At the option of the Company, any payment by the Company required
hereunder may be made by check mailed to the Holder at the last address for the
Holder appearing on the records of the Company. This Note may be prepaid in
whole or part without penalty, at any time and from time to time, by the Company
prior to Maturity.
1. No Avoidance. The Company shall not, by amendment of its Articles of
Incorporation or through any reorganization, transfer of assets, consolidation,
merger, dissolution, issuance or sale of securities or any other voluntary
action, nor shall the Holder by any action, avoid or seek to avoid the
performance of any of the provisions of this Note.
2. Application of Payments. All payments received shall be applied
first to charges other than interest and principal, if any, owing hereunder,
then to accrued interest then due, then
1
<PAGE>
to principal, except that, after the occurrence and during the continuation of
any default under this Note, all amounts received shall be applied in such order
as Holder, in its sole discretion, may elect.
3. No Waiver. The acceptance by Holder of any payment under this Note
after the date that such payment is due shall not constitute a waiver of the
right to require prompt payment when due of future or succeeding payments or to
declare a default as herein provided for any failure to so pay. The acceptance
by Holder of the payment of a portion of any installment at any time that such
installment is due and payable in its entirety shall neither cure nor excuse the
default caused by the failure to pay the whole of such installment and shall not
constitute a waiver of Holder's right to require full payment when due of all
future or succeeding installments.
4. Subordination. Indebtedness evidenced by this Note shall be
subordinate in interest, and in right of payment as to principal and accrued
interest, to the payment of any and all "Senior Indebtedness." "Senior
Indebtedness" shall mean: (i) all indebtedness owed to any lender, whether or
not secured, including, without limitation all indebtedness under revolving
lines of credit and term loans; (ii) all obligations to reimburse any bank or
other person in respect of amounts paid under letters of credit, acceptance or
other similar instruments; (iii) purchase money financing incurred in connection
with the purchase by the Company of goods, fixtures, equipment or inventory;
(iv) capital lease obligations; (v) liens prior in interest to this Note by
operation of law; and (vi) all deferrals, renewals, extensions and refundings
of, and amendments, modifications and supplements to any of the Senior
Indebtedness described above.
5. Default. In the event that the Company: (i) fails to make any
payment of principal or interest hereunder when due and such default shall
continue for thirty (30) days after written notice thereof has been delivered to
the Company; (ii) files a petition or is subject to proceedings for protection
under any bankruptcy, receivership, reorganization or insolvency laws; (iii)
makes a general assignment of all or substantially all of its assets for the
benefit of its creditors or takes any corporate action in furtherance of the
foregoing; (iv) is the subject of an involuntary petition (unless such petition
is dismissed or discharged within (60) days) under any bankruptcy statute nor or
hereafter in effect; (v) has a trustee or receiver appointed for the Company,
its assets or a substantial portion of its assets; (vi) is adjudicated by a
court of competent jurisdiction to be insolvent or bankrupt; or (vii) fails to
observe any of the covenants or agreements on the part of the Company contained
in this Note continuing (without being waived or cured) for a period of thirty
(30) days after receipt from Holder of written notice of such failure (unless
the issue of whether such failure has been cured is being contested in good
faith by the Company); then the Holder may, by written notice to the Company,
declare the outstanding principal amount of this Note to be immediately due and
payable, whereupon the outstanding principal amount hereof shall become and be
immediately due and payable, along with any accrued but unpaid interest.
Any principal repayment or interest payment on this Note which is not paid when
due, whether at stated maturity, by acceleration or otherwise, shall bear
interest at twelve percent (12%) per annum compounded annually, or the maximum
rate permissible by law (which under the laws of the State of Florida shall be
deemed to be the laws relating to permissible rates of interest on commercial
loans), whichever is less.
2
<PAGE>
6. Negotiability. This Note is negotiable. It may be sold, assigned or
transferred by the Holder without the prior written consent of the Board of
Directors of the Company. Upon the death of the Holder, the Holder's
administrator, executor, heir or legatee shall have, upon written notice to the
Company, all rights and interests of the Holder in this Note. Any sale,
assignment, transfer or succession (due to death of the Holder) shall be made in
compliance with all applicable Federal and state securities laws, and upon any
such event, the Company may issue a substitute Note in the name of the new
Holder and representing the then outstanding principal and unpaid accrued
interest.
7. Severability. In case any provision of this Note is held invalid,
illegal or unenforceable by a court of competent jurisdiction, the validity,
legality and enforceability of the remaining provisions shall not in any way be
effected or impaired thereby.
8. Choice of Law; Venue and Jurisdiction; Legal Proceedings. This Note
shall be governed by and construed in accordance with the laws of the State of
Florida, without reference to choice of law principles. In any suit, action or
proceeding arising out of or in connection with this Note, the prevailing party
shall be entitled to an award of the reasonable attorneys' fees and
disbursements incurred by such party in connection therewith.
9. Attorneys' Fees and Costs. In the event it becomes necessary for
Holder to utilize legal counsel for the enforcement of this Note or any of its
terms, and is successful in such enforcement by legal proceedings or otherwise,
Holder shall be reimbursed immediately by the Company for reasonably-incurred
attorneys' fees and other costs and expenses.
10. Waivers. The makers, endorsers, guarantors and sureties of this
Note hereby waive diligence, demand, presentment, notice of non-payment or
dishonor, protest and notice of protest, and expressly agree that the time for
performance of any obligation under this Note may be extended from time to time,
consent to the release of any party liable hereon or herefor, and waive the
right to plead any and all statutes of limitations as a defense to any demand on
this Note, or any guaranty thereof, or to any agreement to pay the same, to the
full extent permissible by law.
11. Business Day. If any interest payment date or the Maturity date
under this Note shall not be a business day in the State of Florida, payment may
be made on the next succeeding day that is a business day, and shall be deemed
hereunder as made on such interest payment date or Maturity date,
notwithstanding any other provisions contained in this Note.
12. Notices. Any notice, request or other communication to either Party
by the other hereunder shall be deemed given on the earlier of the date (i)
actually received and acknowledged; (ii) three (3) days after its mailing by
certified or registered mail, return receipt requested, posatge prepaid; or
(iii) on the business day immediately following its delivery (evidenced by
receipt) to any reputable overnight carrier or transmission via facsimile in
each case addressed to the Party for which it is intended at the address (or
facsimile transmission number) set forth in this Agreement. The place to which
notices are to be given to any Party may be changed from time to time by such
Party by like notice to the other. Notices shall be addressed as follows:
3
<PAGE>
If to the Company:
H. Irwin Levy, Chairman
nStor Technologies, Inc.
100 Century Boulevard
West Palm Beach, Florida 33417
Fax: (561) 640-3160
and
Lawrence Steffann, President
nStor Technologies, Inc,
450 Technology Park Boulevard
Lake Mary, Florida 32746
Fax: (407) 829-3627
With a copy to:
Akerman Senterfitt & Eidson, P.A.
450 East Las Olas Boulevard
Suite 950
Fort Lauderdale, Florida 33301
Attn: Donn Beloff, Esq.
Fax: (954) 463-2224
If to Holder:
W. David Sykes
c/o Andataco, Inc.
10140 Mesa Rim Road
San Diego, CA 92121
Fax: (619) 453-2676
With a copy to:
Luce, Forward, Hamilton & Scripps LLP
600 West Broadway, Suite 2600
San Diego,California 92101
Attn: Dennis J. Doucette, Esq.
Fax: (619) 232-8311
13. Modification. This Note represents the entire understanding of the
parties hereto relating to the subject matter hereof, and supersedes any and all
other prior agreements between the parties. The terms and provisions of this
Note cannot be modified or amended orally or by
4
<PAGE>
course of dealing or conduct, or in any other manner, except in a writing signed
by the party against whom enforcement is sought.
14. Binding Effect. This Note shall be binding on and inure to the
benefit of the respective parties hereto and their successors and assigns.
15. Captions. Section captions are provided for the convenience of the
parties and are not intended to affect the interpretation, performance or
enforcement of this Note.
16. Compliance With Law. It is the responsibility of the Holder ensure
that all payments received by the Holder comply with all tax, securities and
other applicable laws, rules, and regulations of all applicable authorities, and
to provide the Company with any written consents or other documents necessary
for compliance with such laws, rules and regulations.
IN WITNESS WHEREOF, the Company has caused this Note to be signed by
its authorized officer as of this 8th day of June, 1999.
NSTOR TECHNOLOGIES, INC.,
a Delaware corporation
By:/s/ Michael L. Wise
-----------------------
Michael L. Wise
Vice President
5
REGISTRATION RIGHTS AGREEMENT
This REGISTRATION RIGHTS AGREEMENT (this "Agreement"), dated as of June
8, 1999 between nSTOR TECHNOLOGIES, INC., a Delaware corporation (the
"Company"), and W. David Sykes (the "Investor").
RECITALS
The Company has entered into a Purchase Agreement dated March 2, 1999
with W. David Sykes, the Sykes Family Trust and the Sykes Children's Trust of
1993 (as such agreement has been amended, the "Purchase Agreement"). The
Purchase Agreement provides among other things, that the Company will purchase
from W. David Sykes that certain promissory note of Andataco, Inc. owned by and
payable to W. David Sykes in the fair amount of Five Million One Hundred Ninety
Six Dollars ($5,196,000.00) in exchange for consideration which will include
shares (the "Shares") of the Company's Series F Preferred Stock, $.01 par value
per share (the "Preferred Stock") and Warrants (the "Warrants") to purchase
shares of the Company's common stock, $.05 par value per share ("Common Stock").
The Company has agreed to provide certain registration rights under the
Securities Act of 1933, as amended, and the rules and regulations thereunder, or
any similar successor statute (collectively, the "Securities Act"), and
applicable state securities laws with respect to the Common Stock issuable upon
conversion of the Preferred Stock and the exercise of the Warrants.
TERMS OF AGREEMENT
In consideration of the premises and the mutual covenants contained
herein and other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the Company and the Investor hereby agree as
follows:
1. Definitions.
(a) As used in this Agreement, the following terms shall have
the following meanings:
(i) "Register", "registered" and "registration" refer
to a registration effected by preparing and filing a Registration Statement or
Statements on Form S-3 or another form acceptable to Investor in compliance with
the Securities Act and pursuant to Rule 415 under the Securities Act or any
successor rule providing for offering securities on a continuous basis ("Rule
415") and the declaration or ordering of effectiveness of such Registration
Statement by the United States Securities and Exchange Commission ("SEC").
1
<PAGE>
(ii) "Registration Statement" means a registration
statement under the Securities Act.
(iii) "Registerable Securities" means the shares of
Common Stock issuable upon exercise of the Warrants and conversion of the
Preferred Stock.
(b) Capitalized terms used herein and not otherwise defined
herein shall have the respective meanings set forth in the Subscription
Agreement.
2. Registration.
(a) The Company shall prepare and file with the SEC as soon as
reasonably practicable, but in no event more than 30 days, following the
consummation by it of the transactions contemplated by the Purchase Agreement a
registration statement on Form S-3 covering all of the shares of Common Stock
that are issuable upon conversion of the Preferred Stock and exercise of the
Warrants.
(b) The Company represents and warrants that it meets the
requirements for the use of Form S-3 for registration of the sale by the
Investor of the Registerable Securities and the Company shall file all reports
required to be filed by the Company with the SEC in a timely manner so as to
maintain such eligibility for the use of Form S-3.
(c) Notwithstanding the registration of the resale of
Registrable Securities in accordance with Section 2.(a), if at any time of offer
and sale of such Registrable Securities such securities can be sold pursuant to
Rule 144 promulgated under the Securities Act ("Rule 144") in the manner, amount
and on such terms as the Investor wishes to offer and sell such securities, the
Investor may endeavor to offer and sell such securities pursuant to Rule 144.
3. Obligations of the Company. In connection with the registration of
the Registrable Securities, the Company shall:
(a) Prepare and file with the SEC promptly (but in no event
later than the applicable time periods set forth in Section 2.(a)) a
Registration Statement or Statements with respect to the Registrable Securities
and thereafter use its best efforts to cause the Registration Statement to
become effective as soon as possible after such filing, and keep the
Registration Statement effective at all times until such date as is two years,
after the date such Registration Statement is first ordered effective by the
SEC. In any case, the Registration Statement (including any amendments or
supplements thereto and prospectuses contained therein) filed by the Company
shall not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein, or necessary to make the statements
therein, in light of the circumstances in which they were made, not misleading;
(b) Prepare and file with the SEC such amendments (including
post-effective amendments) and supplements to the Registration Statement and the
prospectus used in connection
2
<PAGE>
with the Registration Statement as may be necessary to keep the Registration
Statement effective for the time periods set forth in Section 3.(a);
(c) Furnish to the Investor (i) promptly after the same is
prepared and publicly distributed, filed with the SEC or received by the
Company, one copy of the Registration Statement and any amendment thereto, each
preliminary prospectus and prospectus and each amendment or supplement thereto
and (ii) such number of copies of a prospectus, including a preliminary
prospectus, and all amendments and supplements thereto and such other documents
as the Investor may reasonably request in order to facilitate the disposition of
the Registrable Securities owned by the Investor;
(d) Use reasonable efforts to register and qualify the
Registrable Securities covered by the Registration Statement under such other
securities or blue sky laws of such jurisdictions as the Investor may reasonably
request, prepare and file in those jurisdictions such amendments (including
post-effective amendments) and supplements, take such other actions as may be
necessary to maintain such registrations and qualifications in effect at all
times that the Registration Statement is required to be effective under Section
3.(a) hereof and take all other actions reasonably necessary or advisable to
qualify the Registrable Securities for sale in such jurisdictions; provided,
however, that the Company shall not be required in connection therewith or as a
condition thereto to (i) qualify to do business in any jurisdiction where it
would not otherwise be required to qualify but for this Section 3.(d), (ii)
subject itself to general taxation in any such jurisdiction, (iii) file a
general consent to service of process in any such jurisdiction, (iv) provide any
undertakings that cause more than nominal expense or burden to the Company or
(v) make any change in its charter or bylaws, which in each case the Board of
Directors of the Company determines to be contrary to the best interests of the
Company and its stockholders;
(e) As promptly as practicable after becoming aware of such
event, notify the Investor of the happening of any event of which the Company
has knowledge, as a result of which the prospectus included in the Registration
Statement, as then in effect, includes an untrue statement of a material fact or
omits to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading, and use its best efforts promptly to prepare a supplement
or amendment to the Registration Statement to correct such untrue statement or
omission, and deliver a number of copies of such supplement or amendment to the
Investor as the Investor may reasonably request;
(f) As promptly as practicable after becoming aware of such
event, notify the Investor of the issuance by the SEC of any stop order or other
suspension of effectiveness of the Registration Statement at the earliest
possible time;
(g) Permit a single firm of counsel designated as selling
stockholders' counsel by the Investor and other persons participating in the
offering to review the Registration Statement and all amendments and supplements
thereto a reasonable period of time prior to their filing with the SEC, and
shall not file any document in a form to which such counsel reasonably objects;
3
<PAGE>
(h) Make available for inspection by the Investor, any
underwriter participating in any disposition pursuant to the Registration
Statement and any attorney, accountant or other agent retained by the Investor
or underwriter (collectively, the "Inspectors"), all pertinent financial and
other records, pertinent corporate documents and properties of the Company
(collectively, the "Records"), as shall be reasonably necessary to enable each
Inspector to exercise its due diligence responsibility, and cause the Company's
officers, directors and employees to supply all information which any Inspector
may reasonably request for purposes of such due diligence; provided, however,
that each Inspector shall hold in confidence (making such confidential
information known only to officers, agents or employees thereof who have a need
to know), shall not use any information so obtained for any purpose other than
preparation or review of the registration statement, and shall not make any
disclosure (except to an Investor or underwriter) of any Record or other
information which the Company determines in good faith to be confidential, and
of which determination the Inspectors are so notified, unless (i) the disclosure
of such Records is necessary to avoid or correct a misstatement or omission in
any Registration Statement, (ii) the release of such Records is requested
pursuant to a subpoena or other order from a court or government body of
competent jurisdiction, or (iii) the information in such Records has been made
generally available to the public other than by disclosure in violation of this
or any other agreement. The Company shall not be required to disclose any
confidential information in such Records to any Inspector or Investor until and
unless the Investor or Inspector shall have entered into confidentiality
agreements (in a form as is customary in similar circumstances) with the Company
with respect thereto, substantially in the form of this Section 3.(h). The
Investor agrees that he shall, upon learning that disclosure of such Records is
sought in or by a court or governmental body of competent jurisdiction or
through other means, give prompt notice to the Company and allow the Company, at
the Company's expense, to undertake appropriate action to prevent disclosure of,
or to obtain a protective order for, the Records deemed confidential. The
Company shall hold in confidence and shall not make any disclosure of
information concerning an Investor provided to the Company pursuant to Section
4.(a) hereof unless (i) disclosure of such information is necessary to comply
with federal or state securities laws, (ii) the disclosure of such information
is necessary to avoid or correct a misstatement or omission in any Registration
Statement, (iii) the release of such information is ordered pursuant to a
subpoena or other order from a court or governmental body of competent
jurisdiction or (iv) such information has been made generally available to the
public other than by disclosure in violation of this or any other agreement. The
Company agrees that it shall, upon learning that disclosure of such information
concerning an Investor is sought in or by a court or governmental body of
competent jurisdiction or through other means, give prompt notice to the
Investor, to undertake, at Investor's expense, appropriate action to prevent
disclosure of, or to obtain a protective order for, such information;
(i) Use its best efforts either to cause all the Registrable
Securities covered by the Registration Statement to be listed on the American
Stock Exchange or other national securities exchange and on each additional
national securities exchange on which similar securities issued by the Company
are then listed, if any, if the listing of such Common Stock is then permitted
under the rules of such exchange or secure designation of all the Common Stock
covered by the Registration Statement as a National Association of Securities
Dealers Automated Quotations System ("NASDAQ") "national market system security"
within the meaning of Rule 11Aa2-1 of the SEC under the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), and the quotation
4
<PAGE>
of the Common Stock on the NASDAQ National Market System; or, if, despite the
Company's best efforts to satisfy the preceding clause (i) or (ii), the Company
is unsuccessful in satisfying the preceding clause (i) or (ii), to arrange for
at least two market makers to register with the National Association of
Securities Dealers, Inc. ("NASD") as such with respect to such Common Stock;
(j) Provide a transfer agent and registrar, which may be a
single entity, for the Registrable Securities not later than the effective date
of the Registration Statement;
(k) Cooperate with the Investor to facilitate the timely
preparation and delivery of certificates (not bearing any restrictive legends)
representing Registrable Securities to be sold in the denominations or amounts
as the case may be, and registered in such names as the Investor may reasonably
request; and
(l) take all other reasonable actions necessary to expedite
and facilitate disposition by the Investor of the Registrable Securities
pursuant to the Registration Statement.
4. Obligations of the Investor. In connection with the registration of
the Registrable Securities, the Investor shall have the following obligations:
(a) It shall be a condition precedent to the obligations of
the Company to complete the registration pursuant to this Agreement with respect
to the Investor that the Investor shall furnish to the Company such information
regarding itself and the intended method of disposition of the Common Stock held
by it as shall be reasonably required to effect the registration of the Common
Stock and shall execute such documents in connection with such registration as
the Company may reasonably request. At least fifteen (15) days prior to the
first anticipated filing date of the Registration Statement, the Company shall
notify the Investor of the information the Company requires from the Investor
(the "Requested Information"). For each day that the Requested Information is
not received beginning five business days from the date of its request, the
Company shall have the right to extend the period for filing set forth Section
2.(a) hereof by one day.
(b) The Investor agrees to cooperate with the Company as
reasonably requested by the Company in connection with the preparation and
filing of the Registration Statement hereunder.
(c) The Investor agrees that, upon receipt of any notice from
the Company of the happening of any event of the kind described in Section 3.(e)
or 3.(f), the Investor will immediately discontinue disposition of Registrable
Securities pursuant to the Registration Statement until such Investor's receipt
of the copies of the supplemented or amended prospectus contemplated by Section
3.(e) or 3.(f) and, if so directed by the Company, the Investor shall deliver to
the Company (at the expense of the Company) or destroy (and deliver to the
Company a certificate of destruction) all copies in the Investor's possession,
of the prospectus covering such Registrable Securities current at the time of
receipt of such notice.
(d) In the event the Investor determines to engage the
services of an underwriter, the Investor agrees to enter into and perform its
obligations under an underwriting agreement, in
5
<PAGE>
usual and customary form, including, without limitation, customary
indemnification and contribution obligations, with the managing underwriter of
such offering and take such other actions as are reasonably required in order to
expedite or facilitate the disposition of the Registrable Securities.
5. Expenses of Registration. All expenses (other than brokerage
commissions or discounts) incurred in connection with registrations, filings or
qualifications pursuant to Section 2, including, without limitation, all
registration, listing and qualifications fees, printers and accounting fees and
the fees and disbursements of counsel for the Company, shall be borne by the
Company; provided, however, that the Investor shall bear the fees and
out-of-pocket expenses of the one legal counsel selected pursuant to Section
3.(g) hereof.
6. Indemnification.
(a) By the Company. To the extent permitted by law, the
Company will indemnify and hold harmless the Investor, any underwriter (as
defined in the Securities Act) for the Investor, the directors, if any, of such
underwriter and the officers, if any, of such underwriter, and each person, if
any, who controls any such underwriter within the meaning of the Securities Act
or the Exchange Act (each, an "Indemnified Person"), against any losses, claims,
damages, expenses or liabilities (joint or several) (collectively "Claims") to
which any of them become subject under the Securities Act, the Exchange Act or
otherwise, insofar as such Claims (or actions or proceedings, whether commenced
or threatened, in respect thereof) arise out of or are based upon any of the
following statements, omissions or violations in the Registration Statement, or
any post-effective amendment thereof, or any prospectus included therein: (i)
any untrue statement or alleged untrue statement of a material fact contained in
the Registration Statement or any post-effective amendment thereof or the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, (ii)
any untrue statement or alleged untrue statement of a material fact contained in
any preliminary prospectus if used prior to the effective date of such
Registration Statement, or contained in the final prospectus (as amended or
supplemented, if the Company files any amendment thereof or supplement thereto
with the SEC) or the omission or alleged omission to state therein any material
fact necessary to make the statements made therein, in light of the
circumstances under which the statements therein were made, not misleading or
(iii) any violation or alleged violation by the Company of the Securities Act,
the Exchange Act or any state securities law or any rule or regulation under the
Securities Act, the Exchange Act or any state securities law (the matters in the
foregoing clauses (i) through (iii) being, collectively, "Violations"). Subject
to the restrictions set forth in Section 6.(d) with respect to the number of
legal counsel, the Company shall reimburse the Investor and each such
underwriters or controlling person, promptly as such expenses are incurred and
are due and payable, for any legal fees or other reasonable expenses incurred by
them in connection with investigating or defending any such Claim.
Notwithstanding anything to the contrary contained herein, the indemnification
agreement contained in this Section 6.(a) (i) shall not apply to a Claim arising
out of or based upon a Violation which occurs in reliance upon and in conformity
with information furnished in writing to the Company by any Indemnified Person
or underwriter for such Indemnified Person expressly for use in connection with
the preparation of the Registration Statement or any such amendment thereof or
supplement thereto; (ii) with respect to any preliminary prospectus shall not
inure to the benefit of any such person from whom the person asserting any such
Claim purchased the Common
6
<PAGE>
Stock that are the subject thereof (or to the benefit of any person controlling
such person) if the untrue statement or omission of material fact contained in
the preliminary prospectus was corrected in the prospectus, as then amended or
supplemented, and the Company provided the amended or supplemented prospectus to
such Indemnified Person in accordance with the terms of this Agreement; (iii)
shall not be available to the extent such Claim is based on a failure of the
Investor to deliver or cause to be delivered the prospectus made available by
the Company and the Company provided the prospectus to such Indemnified Person
in accordance with the terms of this Agreement; and (iv) shall not apply to
amounts paid in settlement of any Claim if such settlement is effected without
the prior written consent of the Company, which consent shall not be
unreasonably withheld.
(b) By the Investor. In connection with any Registration
Statement in which an Investor is participating, the Investor agrees to
indemnify and hold harmless, to the same extent and in the same manner set forth
in Section 6.(a), the Company, each of its directors, each of its officers who
signs the Registration Statement, each person, if any, who controls the Company
within the meaning of the Securities Act or the Exchange Act (collectively and
together with an Indemnified Person, an "Indemnified Party"), against any Claim
to which any of them may become subject, under the Securities Act, the Exchange
Act or otherwise, insofar as such Claim arises out of or is based upon any
Violation, in each case to the extent (and only to the extent) that such
Violation occurs (i) in reliance upon and in conformity with written information
furnished to the Company by the Investor expressly for use in connection with
such Registration Statement or (ii) the Investor's violation of Regulation M;
and the Investor will promptly reimburse any legal or other expenses reasonably
incurred by them in connection with investigating or defending any such Claim;
provided, however, that the indemnity agreement contained in this Section 6.(b)
shall not apply to amounts paid in settlement of any Claim if such settlement is
effected without the prior written consent of the Investor, which consent shall
not be unreasonably withheld; provided, further, that in no event shall any
indemnity under this Section 6(b) exceed the net proceeds from the offering
received by such Indemnified Party. Such indemnity shall remain in full force
and effect regardless of any investigation made by or on behalf of such
Indemnified Party and shall survive the transfer of the Common Stock by the
Investor. Notwithstanding anything to the contrary contained herein, the
indemnification agreement contained in this Section 6.(b) with respect to any
preliminary prospectus shall not inure to the benefit of any Indemnified Party
if the untrue statement or omission of material fact contained in the
preliminary prospectus was corrected on a timely basis in the prospectus, as
then amended or supplemented.
(c) The Company shall be entitled to receive indemnities from
underwriters, selling brokers, dealer managers and similar securities industry
professionals participating in any distribution, to the same extent as provided
above, with respect to information such persons so furnished in writing by such
persons expressly for inclusion in the Registration Statement.
(d) Promptly after receipt by an Indemnified Person or
Indemnified Party under this Section 6 of notice of the commencement of any
action (including any governmental action), such Indemnified Person or
Indemnified Party shall, if a Claim in respect thereof is to be made against any
indemnifying party under this Section 6, deliver to the indemnifying party a
written notice of the commencement thereof and the indemnifying party shall have
the right to participate in, and, to the extent the indemnifying party so
desires, jointly with any other indemnifying party
7
<PAGE>
similarly noticed, to assume control of the defense thereof with counsel
mutually satisfactory to the indemnifying parties and the Indemnified Person or
the Indemnified Party, as the case may be; provided, however, that an
Indemnified Person or Indemnified Party shall have the right to retain its own
counsel, with the fees and expenses to be paid by the indemnifying party, if, in
the reasonable written opinion of counsel retained by the indemnifying party,
the representation by such counsel of the Indemnified Person or Indemnified
Party and the indemnifying party would be inappropriate due to actual or
potential differing interests between such Indemnified Person or Indemnified
Party or other party represented by such counsel in such proceeding. The Company
shall pay for only one separate legal counsel for the Investor. The failure to
deliver written notice to the indemnifying party within a reasonable time of the
commencement of any such action shall not relieve such indemnifying party of any
liability to the Indemnified Person or Indemnified Party under this Section 6,
except to the extent that the indemnifying party is prejudiced in its ability to
defend such action. The indemnification required by this Section 6 shall be made
by periodic payments of the amount thereof during the course of the
investigation or defense, as such expense, loss, damage or liability is incurred
and is due and payable.
(e) Contribution. To the extent any indemnification provided
for herein is prohibited or limited by law, the indemnifying party agrees to
make the maximum contribution with respect to any amounts for which it would
otherwise be liable under Section 6 to the fullest extent permitted by law;
provided, however, that no contribution shall be made under circumstances where
the maker would not have been liable for indemnification under the fault
standards set forth in Section 6, no seller of Common Stock guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any seller of Common Stock who was not
guilty of such fraudulent misrepresentation and contribution by any seller of
Common Stock shall be limited in amount to the net amount of proceeds received
by such seller from the sale of such Common Stock.
7. Reports under Exchange Act. With a view to making available to the
Investor the benefits of Rule 144 or any other similar rule or regulation of the
SEC that may at any time permit the Investor to sell securities of the Company
to the public without Registration, until such time as the Investor has sold all
the Registrable Securities pursuant to a Registration Statement or Rule 144, the
Company agrees to:
(a) make and keep public information available, as those terms
are understood and defined in Rule 144;
(b) file with the SEC in a timely manner all reports and other
documents required of the Company under the Securities Act and the Exchange Act;
and
(c) furnish to the Investor so long as the Investor owns
Registrable Securities, promptly upon request, a written statement by the
Company that it has complied with the reporting requirements of Rule 144, the
Securities Act and the Exchange Act, a copy of the most recent annual or
quarterly report of the Company and such other reports and documents so filed by
the Company and such other information as may be reasonably requested to permit
the Investor to sell
8
<PAGE>
such securities pursuant to Rule 144 without Registration. In addition, Investor
shall continue to receive a monthly report from the Company.
8. Assignment of the Registration Rights. The rights to have the
Company register Registrable Securities pursuant to this Agreement may not be
assigned unless the Company agrees to the assignment in writing.
9. Amendment of Registration Rights. Any provision of this Agreement
may be amended and the observance thereof may be waived (either generally or in
a particular instance and either retroactively or prospectively), only with the
written consent of the Company and Investor. Any amendment of waiver effected in
accordance with this Section 9 shall be binding upon the Investor and the
Company.
10. Miscellaneous.
(a) If the Company receives conflicting instructions, notices
or elections from two or more persons or entities with respect to the same
Registrable Securities, the Company shall act upon the basis of instructions,
notice or election received from the registered owner of such Registrable
Securities.
(b) Notices required or permitted to be given hereunder shall
be in writing and shall be deemed to be sufficiently given when personally
delivered or when sent by registered mail, return receipt requested, addressed
if to the Company, at nStor Technologies, Inc., 100 Century Blvd., West Palm
Beach, FL 33417, attn: Mark Levy, and if to the Investor, at the address set
forth for the delivery of notice to such Investor in the Purchase Agreement, or
at such other address as each such party furnishes by notice given in accordance
with this Section 10.(b), and shall be effective, when personally delivered,
upon receipt, and when so sent by certified mail, four business days after
deposit with the United States Postal Service.
(c) Failure of any party to exercise any right or remedy under
this Agreement or otherwise, or delay by a party in exercising such right or
remedy, shall not operate as a waiver thereof.
(d) This Agreement shall be enforced, governed by and
construed in accordance with the laws of the State of Florida applicable to the
agreements made and to be performed entirely within such state, without giving
effect to rules governing the conflict of laws. In the event that any provision
of this Agreement is invalid or unenforceable under any applicable statute or
rule of law, then such provision shall be deemed inoperative to the extent that
it may conflict therewith and shall be deemed modified to conform with such
statute or rule of law. Any provision hereof which may prove invalid or
unenforceable under any law shall not affect the validity or enforceability of
any other provision hereof.
(e) This Agreement constitutes the entire agreement among the
parties hereto with respect to the subject matter hereof. There are no
restrictions, promises, warranties or undertakings,
9
<PAGE>
other than those set forth or referred to herein. This Agreement supersedes all
prior agreements and understandings among the parties hereto with respect to the
subject matter hereof.
(f) Subject to the requirements of Section 9 hereof, this
Agreement shall inure to the benefit of and be binding upon the successors and
permitted assigns of each of the parties hereto.
(g) All pronouns and any variations thereof refer to the
masculine, feminine or neuter, singular or plural, as the context may require.
(h) The headings in the Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
(i) This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original but all of which shall
constitute one and the same agreement. This Agreement, once executed by a party,
may be delivered to the other party hereto by telephone line facsimile
transmission of a copy of this Agreement bearing the signature of the party so
delivering this Agreement.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed by their respective officers thereunto duly authorized as of the day
and year first above written.
nSTOR TECHNOLOGIES, INC.
By: /s/ Mark Levy
------------------------------
Mark Levy
Vice President
W. DAVID SYKES
/s/ W. David Sykes
---------------------------------
Name: W. David Sykes
----------------------------
Address:_________________________
_________________________
Telephone:_______________________
Facsimile:_______________________
10
REGISTRATION RIGHTS AGREEMENT
This REGISTRATION RIGHTS AGREEMENT (this "Agreement"), dated as of June
8, 1999 between nSTOR TECHNOLOGIES, INC., a Delaware corporation (the
"Company"), and_________________ (the "Investor").
RECITALS
In connection with the Subscription Agreement of even date herewith
between the Investor and the Company (the "Subscription Agreement"), the Company
has agreed, upon the terms and subject to the conditions of the Subscription
Agreement, to issue and sell to the Investor shares (the "Shares") of the
Company's Series E Preferred Stock, $.01 par value per share (the "Preferred
Stock") and Warrants (the "Warrants") to purchase shares of the Company's common
stock, $.05 par value per share ("Common Stock"). The Company has agreed to
provide certain registration rights under the Securities Act of 1933, as
amended, and the rules and regulations thereunder, or any similar successor
statute (collectively, the "Securities Act"), and applicable state securities
laws with respect to the Common Stock issuable upon conversion of the Preferred
Stock and the exercise of the Warrants.
TERMS OF AGREEMENT
In consideration of the premises and the mutual covenants contained
herein and other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the Company and the Investor hereby agree as
follows:
1. Definitions.
(a) As used in this Agreement, the following terms shall have
the following meanings:
(i) "Register", "registered" and "registration" refer
to a registration effected by preparing and filing a Registration Statement or
Statements on Form S-3 or another form acceptable to Investor in compliance with
the Securities Act and pursuant to Rule 415 under the Securities Act or any
successor rule providing for offering securities on a continuous basis ("Rule
415") and the declaration or ordering of effectiveness of such Registration
Statement by the United States Securities and Exchange Commission ("SEC").
(ii) "Registration Statement" means a registration
statement under the Securities Act.
1
<PAGE>
(iii) "Registerable Securities" means the shares of
Common Stock issuable upon exercise of the Warrants and conversion of the
Preferred Stock.
(b) Capitalized terms used herein and not otherwise defined
herein shall have the respective meanings set forth in the Subscription
Agreement.
2. Registration.
(a) The Company shall prepare and file with the SEC as soon as
reasonably practicable following the consummation by it of the transactions
contemplated by that certain Purchase Agreement dated March 2, 1999 among the
Company, W. David Sykes, the Sykes Family Trust and the Sykes Children's Trust
of 1993, as amended, a registration statement on Form S-3 covering all of the
shares of Common Stock that are issuable upon conversion of the Preferred Stock
and exercise of the Warrants.
(b) The Company represents and warrants that it meets the
requirements for the use of Form S-3 for registration of the sale by the
Investor of the Registerable Securities and the Company shall file all reports
required to be filed by the Company with the SEC in a timely manner so as to
maintain such eligibility for the use of Form S-3.
(c) Notwithstanding the registration of the resale of
Registrable Securities in accordance with Section 2.(a), if at any time of offer
and sale of such Registrable Securities such securities can be sold pursuant to
Rule 144 promulgated under the Securities Act ("Rule 144") in the manner, amount
and on such terms as the Investor wishes to offer and sell such securities, the
Investor may endeavor to offer and sell such securities pursuant to Rule 144.
3. Obligations of the Company. In connection with the registration of
the Registrable Securities, the Company shall:
(a) Prepare and file with the SEC promptly (but in no event
later than the applicable time periods set forth in Section 2.(a)) a
Registration Statement or Statements with respect to the Registrable Securities
and thereafter use its best efforts to cause the Registration Statement to
become effective as soon as possible after such filing, and keep the
Registration Statement effective at all times until such date as is two years,
after the date such Registration Statement is first ordered effective by the
SEC. In any case, the Registration Statement (including any amendments or
supplements thereto and prospectuses contained therein) filed by the Company
shall not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein, or necessary to make the statements
therein, in light of the circumstances in which they were made, not misleading;
(b) Prepare and file with the SEC such amendments (including
post-effective amendments) and supplements to the Registration Statement and the
prospectus used in connection with the Registration Statement as may be
necessary to keep the Registration Statement effective for the time periods set
forth in Section 3.(a);
2
<PAGE>
(c) Furnish to the Investor (i) promptly after the same is
prepared and publicly distributed, filed with the SEC or received by the
Company, one copy of the Registration Statement and any amendment thereto, each
preliminary prospectus and prospectus and each amendment or supplement thereto
and (ii) such number of copies of a prospectus, including a preliminary
prospectus, and all amendments and supplements thereto and such other documents
as the Investor may reasonably request in order to facilitate the disposition of
the Registrable Securities owned by the Investor;
(d) Use reasonable efforts to register and qualify the
Registrable Securities covered by the Registration Statement under such other
securities or blue sky laws of such jurisdictions as the Investor may reasonably
request, prepare and file in those jurisdictions such amendments (including
post-effective amendments) and supplements, take such other actions as may be
necessary to maintain such registrations and qualifications in effect at all
times that the Registration Statement is required to be effective under Section
3.(a) hereof and take all other actions reasonably necessary or advisable to
qualify the Registrable Securities for sale in such jurisdictions; provided,
however, that the Company shall not be required in connection therewith or as a
condition thereto to (i) qualify to do business in any jurisdiction where it
would not otherwise be required to qualify but for this Section 3.(d), (ii)
subject itself to general taxation in any such jurisdiction, (iii) file a
general consent to service of process in any such jurisdiction, (iv) provide any
undertakings that cause more than nominal expense or burden to the Company or
(v) make any change in its charter or bylaws, which in each case the Board of
Directors of the Company determines to be contrary to the best interests of the
Company and its stockholders;
(e) As promptly as practicable after becoming aware of such
event, notify the Investor of the happening of any event of which the Company
has knowledge, as a result of which the prospectus included in the Registration
Statement, as then in effect, includes an untrue statement of a material fact or
omits to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading, and use its best efforts promptly to prepare a supplement
or amendment to the Registration Statement to correct such untrue statement or
omission, and deliver a number of copies of such supplement or amendment to the
Investor as the Investor may reasonably request;
(f) As promptly as practicable after becoming aware of such
event, notify the Investor of the issuance by the SEC of any stop order or other
suspension of effectiveness of the Registration Statement at the earliest
possible time;
(g) Permit a single firm of counsel designated as selling
stockholders' counsel by the Investor and other persons participating in the
offering to review the Registration Statement and all amendments and supplements
thereto a reasonable period of time prior to their filing with the SEC, and
shall not file any document in a form to which such counsel reasonably objects;
(h) Make available for inspection by the Investor, any
underwriter participating in any disposition pursuant to the Registration
Statement and any attorney, accountant or other agent retained by the Investor
or underwriter (collectively, the "Inspectors"), all pertinent financial and
other records, pertinent corporate documents and properties of the Company
(collectively, the
3
<PAGE>
"Records"), as shall be reasonably necessary to enable each Inspector to
exercise its due diligence responsibility, and cause the Company's officers,
directors and employees to supply all information which any Inspector may
reasonably request for purposes of such due diligence; provided, however, that
each Inspector shall hold in confidence (making such confidential information
known only to officers, agents or employees thereof who have a need to know),
shall not use any information so obtained for any purpose other than preparation
or review of the registration statement, and shall not make any disclosure
(except to an Investor or underwriter) of any Record or other information which
the Company determines in good faith to be confidential, and of which
determination the Inspectors are so notified, unless (i) the disclosure of such
Records is necessary to avoid or correct a misstatement or omission in any
Registration Statement, (ii) the release of such Records is requested pursuant
to a subpoena or other order from a court or government body of competent
jurisdiction, or (iii) the information in such Records has been made generally
available to the public other than by disclosure in violation of this or any
other agreement. The Company shall not be required to disclose any confidential
information in such Records to any Inspector or Investor until and unless the
Investor or Inspector shall have entered into confidentiality agreements (in a
form as is customary in similar circumstances) with the Company with respect
thereto, substantially in the form of this Section 3.(h). The Investor agrees
that he shall, upon learning that disclosure of such Records is sought in or by
a court or governmental body of competent jurisdiction or through other means,
give prompt notice to the Company and allow the Company, at the Company's
expense, to undertake appropriate action to prevent disclosure of, or to obtain
a protective order for, the Records deemed confidential. The Company shall hold
in confidence and shall not make any disclosure of information concerning an
Investor provided to the Company pursuant to Section 4.(a) hereof unless (i)
disclosure of such information is necessary to comply with federal or state
securities laws, (ii) the disclosure of such information is necessary to avoid
or correct a misstatement or omission in any Registration Statement, (iii) the
release of such information is ordered pursuant to a subpoena or other order
from a court or governmental body of competent jurisdiction or (iv) such
information has been made generally available to the public other than by
disclosure in violation of this or any other agreement. The Company agrees that
it shall, upon learning that disclosure of such information concerning an
Investor is sought in or by a court or governmental body of competent
jurisdiction or through other means, give prompt notice to the Investor, to
undertake, at Investor's expense, appropriate action to prevent disclosure of,
or to obtain a protective order for, such information;
(i) Use its best efforts either to cause all the Registrable
Securities covered by the Registration Statement to be listed on the American
Stock Exchange or other national securities exchange and on each additional
national securities exchange on which similar securities issued by the Company
are then listed, if any, if the listing of such Common Stock is then permitted
under the rules of such exchange or secure designation of all the Common Stock
covered by the Registration Statement as a National Association of Securities
Dealers Automated Quotations System ("NASDAQ") "national market system security"
within the meaning of Rule 11Aa2-1 of the SEC under the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), and the quotation of the Common Stock
on the NASDAQ National Market System; or, if, despite the Company's best efforts
to satisfy the preceding clause (i) or (ii), the Company is unsuccessful in
satisfying the preceding clause (i) or (ii), to arrange for at least two market
makers to register with the National Association of Securities Dealers, Inc.
("NASD") as such with respect to such Common Stock;
4
<PAGE>
(j) Provide a transfer agent and registrar, which may be a
single entity, for the Registrable Securities not later than the effective date
of the Registration Statement;
(k) Cooperate with the Investor to facilitate the timely
preparation and delivery of certificates (not bearing any restrictive legends)
representing Registrable Securities to be sold in the denominations or amounts
as the case may be, and registered in such names as the Investor may reasonably
request; and
(l) take all other reasonable actions necessary to expedite
and facilitate disposition by the Investor of the Registrable Securities
pursuant to the Registration Statement.
4. Obligations of the Investor. In connection with the registration of
the Registrable Securities, the Investor shall have the following obligations:
(a) It shall be a condition precedent to the obligations of
the Company to complete the registration pursuant to this Agreement with respect
to the Investor that the Investor shall furnish to the Company such information
regarding itself and the intended method of disposition of the Common Stock held
by it as shall be reasonably required to effect the registration of the Common
Stock and shall execute such documents in connection with such registration as
the Company may reasonably request. At least fifteen (15) days prior to the
first anticipated filing date of the Registration Statement, the Company shall
notify the Investor of the information the Company requires from the Investor
(the "Requested Information"). For each day that the Requested Information is
not received beginning five business days from the date of its request, the
Company shall have the right to extend the period for filing set forth Section
2.(a) hereof by one day.
(b) The Investor agrees to cooperate with the Company as
reasonably requested by the Company in connection with the preparation and
filing of the Registration Statement hereunder.
(c) The Investor agrees that, upon receipt of any notice from
the Company of the happening of any event of the kind described in Section 3.(e)
or 3.(f), the Investor will immediately discontinue disposition of Registrable
Securities pursuant to the Registration Statement until such Investor's receipt
of the copies of the supplemented or amended prospectus contemplated by Section
3.(e) or 3.(f) and, if so directed by the Company, the Investor shall deliver to
the Company (at the expense of the Company) or destroy (and deliver to the
Company a certificate of destruction) all copies in the Investor's possession,
of the prospectus covering such Registrable Securities current at the time of
receipt of such notice.
(d) In the event the Investor determines to engage the
services of an underwriter, the Investor agrees to enter into and perform its
obligations under an underwriting agreement, in usual and customary form,
including, without limitation, customary indemnification and contribution
obligations, with the managing underwriter of such offering and take such other
actions as are reasonably required in order to expedite or facilitate the
disposition of the Registrable Securities.
5
<PAGE>
5. Expenses of Registration. All expenses (other than brokerage
commissions or discounts) incurred in connection with registrations, filings or
qualifications pursuant to Section 2, including, without limitation, all
registration, listing and qualifications fees, printers and accounting fees and
the fees and disbursements of counsel for the Company, shall be borne by the
Company; provided, however, that the Investor shall bear the fees and
out-of-pocket expenses of the one legal counsel selected pursuant to Section
3.(g) hereof.
6. Indemnification.
(a) By the Company. To the extent permitted by law, the
Company will indemnify and hold harmless the Investor, any underwriter (as
defined in the Securities Act) for the Investor, the directors, if any, of such
underwriter and the officers, if any, of such underwriter, and each person, if
any, who controls any such underwriter within the meaning of the Securities Act
or the Exchange Act (each, an "Indemnified Person"), against any losses, claims,
damages, expenses or liabilities (joint or several) (collectively "Claims") to
which any of them become subject under the Securities Act, the Exchange Act or
otherwise, insofar as such Claims (or actions or proceedings, whether commenced
or threatened, in respect thereof) arise out of or are based upon any of the
following statements, omissions or violations in the Registration Statement, or
any post-effective amendment thereof, or any prospectus included therein: (i)
any untrue statement or alleged untrue statement of a material fact contained in
the Registration Statement or any post-effective amendment thereof or the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, (ii)
any untrue statement or alleged untrue statement of a material fact contained in
any preliminary prospectus if used prior to the effective date of such
Registration Statement, or contained in the final prospectus (as amended or
supplemented, if the Company files any amendment thereof or supplement thereto
with the SEC) or the omission or alleged omission to state therein any material
fact necessary to make the statements made therein, in light of the
circumstances under which the statements therein were made, not misleading or
(iii) any violation or alleged violation by the Company of the Securities Act,
the Exchange Act or any state securities law or any rule or regulation under the
Securities Act, the Exchange Act or any state securities law (the matters in the
foregoing clauses (i) through (iii) being, collectively, "Violations"). Subject
to the restrictions set forth in Section 6.(d) with respect to the number of
legal counsel, the Company shall reimburse the Investor and each such
underwriters or controlling person, promptly as such expenses are incurred and
are due and payable, for any legal fees or other reasonable expenses incurred by
them in connection with investigating or defending any such Claim.
Notwithstanding anything to the contrary contained herein, the indemnification
agreement contained in this Section 6.(a) (i) shall not apply to a Claim arising
out of or based upon a Violation which occurs in reliance upon and in conformity
with information furnished in writing to the Company by any Indemnified Person
or underwriter for such Indemnified Person expressly for use in connection with
the preparation of the Registration Statement or any such amendment thereof or
supplement thereto; (ii) with respect to any preliminary prospectus shall not
inure to the benefit of any such person from whom the person asserting any such
Claim purchased the Common Stock that are the subject thereof (or to the benefit
of any person controlling such person) if the untrue statement or omission of
material fact contained in the preliminary prospectus was corrected in the
prospectus, as then amended or supplemented; (iii) shall not be available to the
extent such Claim is based on a failure of the Investor to deliver or cause to
be delivered the prospectus made
6
<PAGE>
available by the Company; and (iv) shall not apply to amounts paid in settlement
of any Claim if such settlement is effected without the prior written consent of
the Company, which consent shall not be unreasonably withheld.
(b) By the Investor. In connection with any Registration
Statement in which an Investor is participating, the Investor agrees to
indemnify and hold harmless, to the same extent and in the same manner set forth
in Section 6.(a), the Company, each of its directors, each of its officers who
signs the Registration Statement, each person, if any, who controls the Company
within the meaning of the Securities Act or the Exchange Act (collectively and
together with an Indemnified Person, an "Indemnified Party"), against any Claim
to which any of them may become subject, under the Securities Act, the Exchange
Act or otherwise, insofar as such Claim arises out of or is based upon any
Violation, in each case to the extent (and only to the extent) that such
Violation occurs (i) in reliance upon and in conformity with written information
furnished to the Company by the Investor expressly for use in connection with
such Registration Statement or (ii) the Investor's violation of Regulation M;
and the Investor will promptly reimburse any legal or other expenses reasonably
incurred by them in connection with investigating or defending any such Claim;
provided, however, that the indemnity agreement contained in this Section 6.(b)
shall not apply to amounts paid in settlement of any Claim if such settlement is
effected without the prior written consent of the Investor, which consent shall
not be unreasonably withheld. Such indemnity shall remain in full force and
effect regardless of any investigation made by or on behalf of such Indemnified
Party and shall survive the transfer of the Common Stock by the Investor.
Notwithstanding anything to the contrary contained herein, the indemnification
agreement contained in this Section 6.(b) with respect to any preliminary
prospectus shall not inure to the benefit of any Indemnified Party if the untrue
statement or omission of material fact contained in the preliminary prospectus
was corrected on a timely basis in the prospectus, as then amended or
supplemented.
(c) The Company shall be entitled to receive indemnities from
underwriters, selling brokers, dealer managers and similar securities industry
professionals participating in any distribution, to the same extent as provided
above, with respect to information such persons so furnished in writing by such
persons expressly for inclusion in the Registration Statement.
(d) Promptly after receipt by an Indemnified Person or
Indemnified Party under this Section 6 of notice of the commencement of any
action (including any governmental action), such Indemnified Person or
Indemnified Party shall, if a Claim in respect thereof is to be made against any
indemnifying party under this Section 6, deliver to the indemnifying party a
written notice of the commencement thereof and the indemnifying party shall have
the right to participate in, and, to the extent the indemnifying party so
desires, jointly with any other indemnifying party similarly noticed, to assume
control of the defense thereof with counsel mutually satisfactory to the
indemnifying parties and the Indemnified Person or the Indemnified Party, as the
case may be; provided, however, that an Indemnified Person or Indemnified Party
shall have the right to retain its own counsel, with the fees and expenses to be
paid by the indemnifying party, if, in the reasonable written opinion of counsel
retained by the indemnifying party, the representation by such counsel of the
Indemnified Person or Indemnified Party and the indemnifying party would be
inappropriate due to actual or potential differing interests between such
Indemnified Person or Indemnified Party or other party represented by such
counsel in such proceeding. The Company
7
<PAGE>
shall pay for only one separate legal counsel for the Investor. The failure to
deliver written notice to the indemnifying party within a reasonable time of the
commencement of any such action shall not relieve such indemnifying party of any
liability to the Indemnified Person or Indemnified Party under this Section 6,
except to the extent that the indemnifying party is prejudiced in its ability to
defend such action. The indemnification required by this Section 6 shall be made
by periodic payments of the amount thereof during the course of the
investigation or defense, as such expense, loss, damage or liability is incurred
and is due and payable.
(e) Contribution. To the extent any indemnification provided
for herein is prohibited or limited by law, the indemnifying party agrees to
make the maximum contribution with respect to any amounts for which it would
otherwise be liable under Section 6 to the fullest extent permitted by law;
provided, however, that no contribution shall be made under circumstances where
the maker would not have been liable for indemnification under the fault
standards set forth in Section 6, no seller of Common Stock guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any seller of Common Stock who was not
guilty of such fraudulent misrepresentation and contribution by any seller of
Common Stock shall be limited in amount to the net amount of proceeds received
by such seller from the sale of such Common Stock.
7. Reports under Exchange Act. With a view to making available to the
Investor the benefits of Rule 144 or any other similar rule or regulation of the
SEC that may at any time permit the Investor to sell securities of the Company
to the public without Registration, until such time as the Investor has sold all
the Registrable Securities pursuant to a Registration Statement or Rule 144, the
Company agrees to:
(a) make and keep public information available, as those terms
are understood and defined in Rule 144;
(b) file with the SEC in a timely manner all reports and other
documents required of the Company under the Securities Act and the Exchange Act;
and
(c) furnish to the Investor so long as the Investor owns
Registrable Securities, promptly upon request, a written statement by the
Company that it has complied with the reporting requirements of Rule 144, the
Securities Act and the Exchange Act, a copy of the most recent annual or
quarterly report of the Company and such other reports and documents so filed by
the Company and such other information as may be reasonably requested to permit
the Investor to sell such securities pursuant to Rule 144 without Registration.
In addition, Investor shall continue to receive a monthly report from the
Company.
8. Assignment of the Registration Rights. The rights to have the
Company register Registrable Securities pursuant to this Agreement may not be
assigned unless the Company agrees to the assignment in writing.
9. Amendment of Registration Rights. Any provision of this Agreement
may be amended and the observance thereof may be waived (either generally or in
a particular instance and
8
<PAGE>
either retroactively or prospectively), only with the written consent of the
Company and Investor. Any amendment of waiver effected in accordance with this
Section 9 shall be binding upon the Investor and the Company.
10. Miscellaneous.
(a) If the Company receives conflicting instructions, notices
or elections from two or more persons or entities with respect to the same
Registrable Securities, the Company shall act upon the basis of instructions,
notice or election received from the registered owner of such Registrable
Securities.
(b) Notices required or permitted to be given hereunder shall
be in writing and shall be deemed to be sufficiently given when personally
delivered or when sent by registered mail, return receipt requested, addressed
if to the Company, at nStor Technologies, Inc., 100 Century Blvd., West Palm
Beach, FL 33417, attn: Mark Levy, and if to the Investor, at the address set
forth under its name in the Subscription Agreement, or at such other address as
each such party furnishes by notice given in accordance with this Section
10.(b), and shall be effective, when personally delivered, upon receipt, and
when so sent by certified mail, four business days after deposit with the United
States Postal Service.
(c) Failure of any party to exercise any right or remedy under
this Agreement or otherwise, or delay by a party in exercising such right or
remedy, shall not operate as a waiver thereof.
(d) This Agreement shall be enforced, governed by and
construed in accordance with the laws of the State of Florida applicable to the
agreements made and to be performed entirely within such state, without giving
effect to rules governing the conflict of laws. In the event that any provision
of this Agreement is invalid or unenforceable under any applicable statute or
rule of law, then such provision shall be deemed inoperative to the extent that
it may conflict therewith and shall be deemed modified to conform with such
statute or rule of law. Any provision hereof which may prove invalid or
unenforceable under any law shall not affect the validity or enforceability of
any other provision hereof.
(e) This Agreement constitutes the entire agreement among the
parties hereto with respect to the subject matter hereof. There are no
restrictions, promises, warranties or undertakings, other than those set forth
or referred to herein. This Agreement supersedes all prior agreements and
understandings among the parties hereto with respect to the subject matter
hereof.
(f) Subject to the requirements of Section 9 hereof, this
Agreement shall inure to the benefit of and be binding upon the successors and
permitted assigns of each of the parties hereto.
(g) All pronouns and any variations thereof refer to the
masculine, feminine or neuter, singular or plural, as the context may require.
9
<PAGE>
(h) The headings in the Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
(i) This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original but all of which shall
constitute one and the same agreement. This Agreement, once executed by a party,
may be delivered to the other party hereto by telephone line facsimile
transmission of a copy of this Agreement bearing the signature of the party so
delivering this Agreement.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed by their respective officers thereunto duly authorized as of the day
and year first above written.
nSTOR TECHNOLOGIES, INC.
By:__________________________________
Mark Levy
Vice President
INVESTOR
_____________________________________
Name:________________________________
Address:_____________________________
_____________________________
Telephone:___________________________
Facsimile:___________________________
10
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made effective as of the ___ day
of _____________, 1999, by and between nSTOR CORPORATION, a Delaware corporation
(the "Company"), and W. DAVID SYKES, an individual ("Sykes," and with the
Company, each a "Party" and together, the "Parties").
RECITALS
The Company's parent, nStor Technologies, Inc., a Delaware corporation ("nSTI"),
and Sykes are parties to a Purchase Agreement dated as of March 2, 1999, as
amended (the "Purchase Agreement"), whereby, among other things (a) nSTI has
purchased all of the shares of common stock of Andataco, Inc., a Massachusetts
corporation ("Andataco") owned by certain Sykes family trusts, and a promissory
note of Andataco payable to Sykes, and (b) Sykes has covenanted and agreed,
subject to certain limitations, not to compete with nSTI, the Company and
Andataco.
In furtherance of Section 3 of the Purchase Agreement, the Company and Sykes
wish to enter into this Agreement to provide for the employment of Sykes as the
Executive Vice President of Marketing and Sales of the Company, upon the terms
and subject to the conditions provided herein.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein, the Company and Sykes agree as follows:
1. Employment and Term
-------------------
(a) The Company hereby employs Sykes as the Executive Vice President of
Marketing and Sales of the Company, for a term of three years commencing on the
date hereof (the "term of this Agreement"), and Sykes agrees to be so employed,
upon the terms and subject to conditions provided herein. Each period of 365
days during the term of this Agreement, the first such period commencing at
12:01 A.M. on the date hereof and ending at midnight on the 364th day following
the date hereof, shall be referred to herein as an "Annual Period."
(b) It is understood and agreed that Sykes is now and will continue to
be employed by Andataco during the term of this Agreement as President of
Andataco pursuant to the Employment Agreement between Andataco and Sykes dated
as of May 1, 1997 (the "Andataco Employment Agreement") and that: (i) Sykes'
employment by Andataco shall run concurrently with Sykes' employment under this
Agreement and be upon the same terms and subject to the same conditions as
provided herein, (ii) Sykes shall render services to the Company and Andataco
1
<PAGE>
for the same aggregate base salary, bonus compensation and other benefits as
provided in Section 3 hereof, without duplication (collectively, the
"Compensation"), except that the payment of the Compensation shall be allocated
between the Company and Andataco as the respective boards of directors of nSTI
and Andataco may from time to time agree, and (iii) Andataco and Sykes have
entered into an Amended and Restated Andataco Employment Agreement on the date
hereof to reflect the foregoing.
2. Authority and Limitations. Sykes shall have the authority and be
responsible for all marketing and sales of the Company's products and services,
including the responsibility to develop and implement plans for the marketing
and sales of such products and services and the authority to hire and fire
(subject to the Company's rules, policies and procedures) employees of the
Company who provide services related to the marketing and sales of such products
and services. Sykes shall receive the same notice of meetings and written
consent actions of the Boards of Directors of nSTI and the Company as are
required to be given to the Directors thereof and be entitled to attend all such
meetings as a non-voting participant, and shall attend such meetings if
requested by either Board of Directors for the purpose of reporting and making
presentations to the Directors. Sykes shall have such other authority,
responsibilities and duties, and be subject to such limitations, as the Board of
Directors of the Company (the "Board") and Sykes may mutually agree. Sykes
agrees that throughout his employment hereunder, he will (a) faithfully
discharge such authority, responsibilities and duties in accordance with this
Agreement, (b) devote his entire time, good faith, best efforts, ability, skill
and attention to the business of the Company, and (c) follow and act in
accordance with all of the Company's rules, policies and procedures.
3. Compensation. Sykes shall receive the following salary and other
compensation and benefits for his services under this Agreement:
(a) A base salary at the rate of $325,000 per annum, payable in 26
bi-weekly installments commencing approximately two weeks following the date of
this Agreement for the two week period beginning on the date of this Agreement,
less appropriate withholding of federal income, social security, Medicare and
other required and appropriate federal and state taxes and other amounts.
(b) In addition to the base salary, an annual bonus in an amount equal
to 1 1/2% of the first $15,000,000 of sales in excess of $65,000,000, during
each of: (i) the period from the Closing Date under the Purchase Agreement (as
defined therein) to December 31, 1999, (ii) the calendar year periods ended
December 31, 2000 and December 31, 2001, and (iii) the period from January 1,
2002 to the last day of the term of this Agreement, not including sales to
original equipment manufacturers ("OEM's") and returned goods; plus an amount
equal to 1 3/4% of the first $10,000,000 of such sales in excess of $80,000,000;
plus an amount equal to 2% of such sales in excess of $90,000,000; plus an
amount equal to 1% of all sales to OEM's, not including returned goods, other
than sales to the OEM's listed on Exhibit A attached hereto. Such bonus shall be
paid within 30 days following the end of each such period and be subsequently
adjusted, if necessary, upon the determination of such sales by the independent
accountants for the Company in connection with its annual audit. Any adjustment
in favor of Sykes shall be paid by the Company immediately upon such
determination and any adjustment in favor of the Company shall be paid by Sykes,
2
<PAGE>
at the option of the Company, immediately upon such determination or by
deductions from Sykes' base salary and/or future bonus compensation.
Notwithstanding the bonus calculation set forth above, in no event shall Sykes'
bonus be less than $175,000 per year, on an annualized basis, which minimum
bonus shall be paid to Sykes in equal monthly increments.
(c) In addition to the base salary and bonus compensation, Sykes shall
receive the following additional benefits:
(i) Sykes shall be entitled to participate in the Company's
health, life and disability insurance plans, and the Company's 401(k) retirement
benefit plan, on the same basis as all other senior officers of the Company.
(ii) Paid vacation time of up to four weeks per Annual Period,
which vacation time may not be accrued for use during subsequent Annual Periods.
(iii) The Company shall lease a new four door Mercedes-Benz
automobile (either E55 of E420 model, at Sykes' option) for Sykes' exclusive use
during the term of this Agreement.
(iv) Payment or reimbursement, upon presentation of reasonable
documentation, for travel, gasoline, entertainment, cellular telephone, travel
club dues (United Airlines, Alaska Airlines, Delta Airlines and USAir) and other
expenses incident to the performance of his duties under this Agreement.
4. Stock Option.
(a) The Company grants to Sykes an option (the "Option"), effective the
Closing Date under the Purchase Agreement, to purchase 1,100,000 shares of
nSTI's common stock (the "Option Shares") at an option price of $2.00 per Option
Share (the "Purchase Price"), which the Parties agree was the market price of
publicly traded stock of the Company on the day that Sykes, nSTI and the Company
reached conditional oral agreement as to Sykes' employment by the Company and
the grant of the Option. The Option Shares shall vest and the Option shall be
exercisable as to such vested Option Shares, in whole or in part, as follows:
266,667 options on the last day of the first Annual Period; and 416,667 options
on the last day of each of the second and third Annual Periods. After any
portion of the Option Shares have vested, they shall be exercisable for a period
of five years, regardless of Sykes' termination of employment hereunder for any
reason. Any Option Shares that are not vested shall fully vest if (a) Sykes'
employment under this Agreement is terminated by the Company other than for
"cause" (as defined in Section 5(b)), or (b) Sykes resigns for "good reason" (as
defined in Section 5(c)), effective upon the date of such termination or
resignation. Any Option Shares that are not vested shall be forfeited and the
Option shall terminate if (y) Sykes' employment under this Agreement is
terminated by the Company for "cause", or (z) Sykes resigns other than for "good
reason", effective upon the date of such termination or resignation.
3
<PAGE>
(b) Notwithstanding any vesting provisions set forth in Section 4(a) or
anything else in this Agreement to the contrary, all Option Shares shall vest
and become exercisable immediately prior to any Change in Control during the
term of this Agreement. For purposes hereof, "Change in Control" shall have the
meaning set forth in Exhibit B attached hereto.
(c) If there shall be an increase in the number of issued shares of
common stock of nSTI entitled to vote by reason of any share dividend, share
split-up, recapitalization or reorganization, or decrease thereof by reason of a
combination of shares, so-called reverse split, recapitalization or
reorganization, the number of Option Shares shall be adjusted accordingly so
that the number of Option Shares shall represent the same percentage of the
aggregate of the Option Shares and the issued common stock of nSTI following any
such share dividend, share split-up, combination of shares, reverse split,
recapitalization or reorganization as they did prior to any such share dividend,
share split-up, combination of shares, reverse split, recapitalization or
reorganization. Nothing in this Section 4(c) shall result in any adjustment of
the Option Shares because of the issuance by nSTI of its capital stock for any
other reason, including, without limitation, in connection with any public or
private offering of stock or any merger or consolidation of nSTI with or into
any other entity, or the exchange of such capital stock for the stock or assets
of any other entity.
(d) The Option, or any portion thereof, may be exercised only in
accordance with the terms of this Section 4 and solely by delivery to the
Secretary of nSTI of all of the following items prior to the time when the
Option or such portion becomes unexercisable under the terms of this Section 4:
(i) Notice in writing signed by Sykes, stating that the Option
or portion thereof is thereby exercised;
(ii) Full payment (in cash or by cashiers' or certified check)
for the Option Shares with respect to which the Option or portion
thereof is exercised;
(iii) Full payment (in cash or by cashiers' or certified
check) upon demand of an amount sufficient to satisfy any federal
(including FICA and FUTA amounts), state, and/or local withholding tax
requirements at the time Sykes or his beneficiary recognizes income for
federal, state, and/or local tax purposes as the result of the receipt
of Option Shares pursuant to the exercise of the Option or portion
thereof;
(e) Notwithstanding the provisions of Section 4(d)(ii), upon receipt by
nSTI of Sykes' notice to exercise as provided in Section 4(d)(i), nSTI, in its
sole discretion, may elect to waive the payment of the exercise price by Sykes
under Section 4(d)(ii) and, instead, effect a "cashless net exercise" of the
portion of the Option Sykes desires to exercise, in which event nSTI shall issue
to Sykes either:
(i) the number of Option Shares computed using the following
formula:
<TABLE>
<CAPTION>
<S> <C> <C>
X = Y(A-B)
A
4
<PAGE>
where: X = the number of Option Shares to be issued to Sykes
Y = the gross number of Option Shares underlying the portion of the
Option to be exercised
A = the Current Market Price on the day prior to exercise
B = the exercise price of the Option; or
(ii) cash in the amount computed according to the following
formula:
Z = Y(A-B)
where: Z = the cash to be paid to Sykes and the definitions of Y, A and B
are as set forth above; or
</TABLE>
(iii) any combination of cash and stock (as calculated in (i)
or (ii) above).
For purposes of this Section 4(e), the "Current Market Price" shall be
determined as follows:
(i) if the security at issue is listed on a national
securities exchange or admitted to unlisted trading privileges on such
an exchange or quoted on either the National Market System or the Small
Cap Market of the automated quotation service operated by Nasdaq, Inc.
("NASDAQ"), the Current Market Price shall be the last reported sale
price of that security on such exchange or system on the day for which
the Current Market Price is to be determined or, if no such sale is
made on such day, the average of the highest closing bid and lowest
asked price for such day on such exchange or system; or
(ii) if the security at issue is not so listed or quoted or
admitted to unlisted trading privileges and bid and asked prices are
not reported, the Current Market Price shall be calculated using the
following formula:
L = M/ N
where: L = the Current Market Price
M = the revenue for the Company in
the most recently completed
fiscal year
N = the total outstanding shares of
common stock of the Company as
of the date of exercise
5
<PAGE>
(f) The Option Shares deliverable upon the exercise of the Option, or
any portion thereof, may be either previously authorized but unissued shares or
issued shares which have been reacquired by nSTI. Such Option Shares shall be
fully paid and nonassessable.
(g) Sykes shall not be, nor have any of the rights or privileges of, a
shareholder of nSTI in respect of any Option Shares purchasable upon the
exercise of any part of the Option unless and until certificates representing
such shares shall have been issued by nSTI to Sykes.
(h) The Company represents to Sykes that there will be sufficient
shares of common stock of nSTI reserved for issuance at all times to permit the
Company to fulfill its obligations under this Section 4. The Company further
represents to Sykes that the Option Shares, upon vesting, shall be registered
under the Securities Act of 1933, as amended (the "Act"), and shall be freely
tradable without legend, and that nSTI shall register sufficient shares of its
common stock to comply with this Section 4(h) when it next registers any of its
common stock under a Form S-8, but in no event effective later than the first
date on which any of the Option Shares shall vest pursuant to Section 4(a)
hereof.
5. Termination.
(a) Sykes may be removed as an officer and employee of the Company and this
Agreement may be terminated by the Company at any time prior to the end of the
term of this Agreement, and Sykes may resign as an officer and employee of the
Company and terminate this Agreement at any time prior to the end of the term of
this Agreement upon 90 days prior notice to the Company. If Sykes is removed
other than for "cause," he shall be entitled to (i) continuation of his base
salary and minimum annual bonus (but not the benefits provided in Section 3(c)
hereof) for the remaining term of this Agreement, and (ii) the amount of
$275,000 in full settlement of any then unpaid additional bonus compensation,
and all outstanding unvested Option Shares shall immediately vest and be
exercisable for a period of five years. If Sykes resigns for "good reason" in
compliance with the first sentence of this Section 5(a), he shall be entitled to
(i) continuation of his base salary (but not the benefits provided in Section
3(c) hereof) for the remaining term of this Agreement, and (ii) an amount equal
to the product of (A) a fraction, the numerator of which is the number of days
for which he was employed by the Company during the Annual Period in which such
removal or resignation occurred and the denominator of which is 365 and (B) the
bonus compensation to which he would have been entitled pursuant to Section 3(b)
hereof if he had been employed for the full term of such Annual Period, which
amount shall be paid as soon as the independent accountants for the Company are
able to determine the sales upon which such amount is based, and all outstanding
unvested Option Shares shall immediately vest and be exercisable for a period of
five years. If Sykes is removed because of his death or disability (as
hereinafter defined), he shall be entitled to (i) continuation of his base
salary and the benefits provided in Section 3(c)(i) hereof for a period of six
months following such removal, and (ii) an amount determined pursuant to clause
(ii) of the immediately preceding sentence. If Sykes is removed for "cause," or
resigns other than for "good reason," his base salary and all other compensation
and benefits under this Agreement, including any unpaid bonus under Section 3(b)
and all benefits provided in Section 3(c), shall terminate immediately upon such
removal or resignation. Notwithstanding Sykes' obligation to give the Company 90
6
<PAGE>
days prior notice of his resignation for any reason, the Board may accelerate
the effective date of his resignation to any earlier date determined by the
Board upon notice to Sykes.
(b) For purposes of this Agreement "cause" shall, at the Company's
option, consist of any of the following occurrences or acts:
(i) Engaging or participating in any activity which is
directly competitive with or intentionally injurious to the Company.
(ii) The commission by Sykes of any fraud against the Company
or use or appropriation for his personal use and benefit of any funds,
assets or properties of the Company not authorized by the Company to be
so used or appropriated.
(iii) Sykes' knowing violation of law, conviction for
commission of a felony or conviction for a crime involving dishonesty
or moral turpitude.
(c) For purposes of this Agreement "good reason" shall, at Sykes'
option, consist of any of the following occurrences or acts:
(i) The Company's requirement or direction that Sykes relocate
from the greater San Diego metropolitan area.
(ii) Any attempt by the Company to substantially reduce Sykes'
compensation or benefits or materially change his responsibilities or
duties.
(d) Upon any such removal or resignation, Sykes may be immediately
denied access to the Company's offices, facilities, files, information and data,
except that upon any resignation and during any notice period that Sykes may
continue to be employed by the Company, the Board may either (i) deny Sykes
access, to the extent that the Board may determine, to the Company's offices,
facilities, files, information and data, or (ii) reassign the title and/or
responsibilities and duties of Sykes and impose reasonable restrictions on
Sykes' access to the Company's files, information and data.
(e) This Agreement and Sykes' employment hereunder shall terminate
immediately and without the necessity of any notice or any other action by any
Party upon the death or disability of Sykes. For the purpose of this Agreement,
"disability" shall be defined as his physical or mental inability to perform his
responsibilities and duties under this Agreement for a continuous period of 90
days or more as reasonably determined by Board upon consultation with an
independent, reputable health care professional specializing in the appropriate
discipline.
6. Confidentiality; Company Property.
(a) Sykes acknowledges that financial statements, trade secrets,
customer lists, methods of doing business and other matters involving the
Company's and nSTI's business, activities, prospects, operations and functions,
7
<PAGE>
including any systems, computer programs, know how and other confidential
information obtained by Sykes during his employment by the Company or his prior
employment by Andataco, or provided to Sykes by the Company or nSTI, are
confidential business information and proprietary to the Company ("Confidential
Information"), and shall be maintained as confidential by Sykes during and after
his employment by the Company. Sykes will take all reasonable measures to avoid
disclosure, dissemination or unauthorized use of Confidential Information. Sykes
will not, except as expressly provided in this Agreement, disclose Confidential
Information to anyone other than another employee of Company with a need to know
and who is likewise bound by confidentiality requirements without Company's
prior written consent, and will not use, or permit others to use, Confidential
Information for any purpose other than the purpose for which it was disclosed.
Notwithstanding the foregoing, the provisions hereof will not apply to any
information that (i) is or becomes publicly available without breach of this
Agreement, (ii) is rightfully received from a third party who did not acquire or
disclose such information by a wrongful or tortious act, or (iii) is required by
law to be disclosed by Sykes.
(b) Sykes acknowledges that any and all notes, records, computer disks,
training materials and other documents and material relating to the Company and
nSTI and their businesses and obtained by or provided to Sykes, or otherwise
made, produced or compiled during the term of this Agreement or during Sykes
prior employment by Andataco, regardless of the type of medium in which they are
preserved, are the sole and exclusive property of the Company and nSTI and shall
be surrendered to the Company upon termination of Sykes' employment hereunder
and on demand by the Company at any time. Sykes shall not retain copies of any
property so surrendered.
(c) Sykes agrees that if he violates any of the provisions of this
Section 6, the Company and nSTI would sustain irreparable harm and, therefore,
in addition to any other remedies that might be available to it, the Company and
nSTI shall be entitled to an injunction restraining Sykes from committing or
continuing any such violation of this Agreement without the requirement to post
a bond or other security. The Company and Sykes agree that in the event any of
the provisions of this Section 6 shall be held to be in any way an unreasonable
restriction on Sykes, the court so holding may modify or eliminate any such
restriction to the extent necessary to render such provisions enforceable.
7. Acquisition of Other Businesses. In the event that nSTI, the Company or
Andataco acquire additional companies or the assets and businesses of other
companies that are engaged in substantially the same business as conducted by
nSTI, the Company or Andataco, and if nSTI, the Company or Andataco give Sykes
notice that he is expected to perform any services for such acquired companies
or businesses, Sykes, nSTI and the Company shall negotiate, reasonably and in
good faith, and enter into separate agreements or amendments to this Agreement,
regarding the compensation and duties of Sykes in regard to such acquired
companies or businesses. Nothing in this Section 7 shall effect Sykes' right to
terminate this Agreement for "good reason" under Section 5(c) hereof.
8. Notices. Any notice, request or other communication to either Party by the
other hereunder shall be deemed given on the earlier of the date (i) actually
received and acknowledged; (ii) three (3) days after its mailing by certified or
8
<PAGE>
registered mail, return receipt requested, postage prepaid; or, (iii) on the
business day immediately following its delivery (evidenced by receipt) to any
reputable overnight carrier or transmission via facsimile in each case addressed
to the Party for which it is intended at the address (or facsimile transmission
number) set forth in this Agreement. The place to which notices are to be given
to any Party may be changed from time to time by such Party by like notice to
the other. Notices shall be addressed as follows:
If to the Company:
-----------------
Lawrence Steffann, President
nStor Corporation
450 Technology Park Boulevard
Lake Mary, FL 32746
Fax: (407) 829-3627
If to Sykes:
-----------
W. David Sykes
C/o Andataco, Inc.
10140 Mesa Rim Road
San Diego, CA 92121
Fax: (619) 453-2676
(or, following any termination of this employment, to his home
address and facsimile number as then known to the Company or
identified by Sykes pursuant to notice)
9. Complete Agreement. This Agreement constitutes the complete and exclusive
statement of the agreement between the Parties with respect to the subject
matter of this Agreement. This Agreement replaces and supersedes all prior
agreements and negotiations by and between the Parties and each of the Parties
acknowledges and agrees that no agreements, representations, warranties or
collateral promises or inducements have been made by or to it or him except as
expressly set forth in this Agreement. These acknowledgments and agreements are
contractual and not mere recitals.
10. Assignment. This Agreement and the rights, obligations and duties of either
Party may not be assigned by such Party without the prior written consent of the
other Party, except that the Company may assign this Agreement to any successor
entity upon the merger or consolidation of the Company or the sale of
substantially all of the Company's assets, or to any parent or subsidiary of the
Company that succeeds to the Company's business. All of the terms and conditions
of this Agreement shall be binding upon and inure to the benefit of Sykes and
his personal representatives, heirs, executors and administrators, and the
permitted successors and assigns of the Parties.
9
<PAGE>
11. Waiver. The waiver by either Party, or the failure by either Party to claim
a breach, of any provision of this Agreement will not constitute a waiver of any
subsequent breach or affect in any way the effectiveness of such provision.
12. Governing Law. This Agreement has been executed and delivered by the Parties
in the State of Florida and will be governed by and construed and enforced in
accordance with the laws of the State of Florida, without regard to conflict of
laws principles.
13. Partial Invalidity. If any provision of this Agreement is held to be
illegal, invalid, or unenforceable under the present or future laws effective
during the term of this Agreement, such provision will be fully severable; this
Agreement shall be construed and enforced as if such illegal, invalid, or
unenforceable provision had never comprised a part of this Agreement; the
remaining provisions of this Agreement will remain in full force and effect and
will not be affected by the illegal, invalid, or unenforceable provision; and
there shall be added automatically, as a part of this Agreement, a provision as
similar in terms to such illegal, invalid, or unenforceable provision as may be
possible and be legal, valid and enforceable.
14. Jurisdiction. The parties hereto agree and consent to the exclusive
jurisdiction of the Circuit Courts of the State of Florida and the United States
District Courts in the State of Florida in connection with all actions or
proceedings arising out of or in connection with this Agreement and the subject
matter hereof.
16. Legal Fees. Should either Party institute a legal action or proceeding to
enforce the terms, conditions and provisions of this Agreement, or to recover
damages or obtain any other relief, including equitable relief, in connection
with any matters arising out of or in connection with this Agreement, the
substantially prevailing Party will be entitled to all court costs and
reasonable attorney, paralegal and accountant fees and expenses, including in
any pre-trial, appellate, post-award or post-judgment and related bankruptcy
proceedings.
17. Amendments. To be effective, any amendment to this Agreement must be in
writing and signed by the Company and Sykes.
IN WITNESS WHEREOF, the parties hereto have duly executed and delivered this
Agreement as of the date first above written.
nSTOR CORPORATION
By: /s/ Mark Levy
------------------------------
Mark Levy, Vice President
/s/ W. David Sykes
------------------------------
W. David Sykes, Individually
10
<PAGE>
The undersigned, nStor Technologies, Inc., the owner of all of the issued and
outstanding stock of nStor Corporation, hereby unconditionally and irrevocably
guarantees to W. David Sykes and his heirs, distributees, personal
representatives, executors and administrators, the full and complete performance
of all obligations of nStor Corporation under and pursuant to the above
Employment Agreement, including, without limitation, the payment of all amounts
as and when due.
nSTOR TECHNOLOGIES, INC.
By: /s/ Mark Levy
--------------------------
Mark Levy, Vice President
11
<PAGE>
Exhibit A
Original Equipment Manufacturers Not Subject to Bonus Compensation
------------------------------------------------------------------
Silicon Graphics
Discrete Graphics
Intergraph
12
<PAGE>
Exhibit B
A "Change in Control" means the following and shall be deemed to occur
if any of the following events occurs:
(a) Any person, entity or group, within the meaning of Section 13(d)
or 14(d) of the Securities Exchange Act of 1934 (the "Exchange Act"), but
excluding nSTI and its subsidiaries and any employee benefit or stock ownership
plan of nSTI or its subsidiaries and also excluding an underwriter or
underwriting syndicate that has acquired nSTI's securities solely in connection
with a public offering thereof (such person, entity or group being referred to
herein as a "Person") becomes the beneficial owner (within the meaning of Rule
13d-3 promulgated under the Exchange Act) of 30% or more of either the then
outstanding shares of Common Stock or combined voting power of nSTI's then
securities entitled to vote generally in the election of directors; or
(b) Individuals who, as of the effective date hereof, constitute the
Board of Directors of nSTI (the "Incumbent Board") cease for any reason to
constitute at least a majority of the Board of Directors of nSTI, provided that
any individual who becomes a director after the effective date hereof whose
election, or nomination for election by nSTI's shareholders, is approved by a
vote of at least a majority of the directors then comprising the Incumbent Board
shall be considered to be a member of the Incumbent Board unless that individual
was nominated or elected by any Person having the power to exercise, through
beneficial ownership, voting agreement and/or proxy, 20% or more of either the
outstanding shares of Common Stock or the combined voting power of nSTI's then
outstanding voting securities entitled to vote generally in the election of
directors, in which case that individual shall not be considered to be a member
of the Incumbent Board unless such individual's election or nomination for
election by nSTI's shareholders is approved by a vote of at least two-thirds of
the directors then comprising the Incumbent Board; or
(c) Consummation by nSTI of the sale or other disposition by nSTI of
all or substantially all of nSTI's assets or a reorganization or merger or
consolidations of nSTI with any other person, entity or corporation, other than
(i) a reorganization or merger or consolidation that would result
in the voting securities of nSTI outstanding immediately prior thereto (or, in
the case of a reorganization or merger or consolidation that is preceded or
accomplished by an acquisition or series of related acquisitions by any Person,
by tender or exchange offer or otherwise, of voting securities representing 5%
or more of the combined voting power of all securities of nSTI, immediately
prior to such acquisition or the first acquisition in such series of
acquisitions) continuing to represent, either by remaining outstanding or by
being converted into voting securities of another entity, more than 50% of the
combined voting power of the voting securities of nSTI or such other entity
outstanding immediately after such reorganization or merger or consolidation (or
series of related transactions involving such a reorganization or merger or
consolidation), or
13
<PAGE>
(ii) a reorganization or merger or consolidation effected to
implement a recapitalization or reincorporation of nSTI (or similar transaction)
that does not result in a material change in beneficial ownership of the voting
securities of nSTI or its successor; or
(d) Approval by the shareholders of nSTI or an order by a court of
competent jurisdiction of a plan of liquidation of nSTI.
14
Irwin Levy
c/o nSTOR Technologies, Inc.
100 Century Boulevard
West Palm Beach, FL 33417
June 8, 1999
W. David Sykes
2016 Oceanfront
Del Mar, CA 92014
Re: Options Regarding Common Stock of nSTOR Technologies, Inc.
---------------------------------------------------------
Dear David,
In consideration of $10.00, the mutual covenants contained herein and other good
and valuable consideration, the receipt of which is hereby acknowledged, I
hereby agree with you as follows:
You represent that from the date of this letter through January 30, 2000, you
intend to sell shares of common stock of nSTOR Technologies, Inc., a Delaware
corporation (the "Company"), on the public market at a price of $2.50 or more
per share (the "Public Sales").
At any time from the date of this letter agreement through September 30, 1999, I
may deliver to you a written notice of my intent to purchase from you, at $3.00
per share, that number of shares (the "Call Shares") of common stock of the
Company with a value (at $3.00 per share) equal to $3,200,000 less any amounts
received by you from the Public Sales. Within ten (10) days of such notice, I
will deliver to you payment for the Call Shares by delivery of a personal check.
Upon receipt of payment for the Call Shares, you will deliver to me the stock
certificate(s) representing the Call Shares, fully endorsed for transfer to me.
At any time from February 1, 2000 through February 5, 2000, you may deliver to
me a written notice of the number of shares (the "Put Shares") of common stock
of the Company you will sell to me. Within ten (10) days of such notice, I will
purchase the Put Shares from you, at $3.00 per share, by delivery to you of a
personal check; provided, however, that under no circumstances will I be
obligated to purchase from you an amount of Put Shares with a value (at $3.00
per share) greater than $3,200,000 less any amounts received by you from the
Public Sales. Upon receipt of payment for the Put Shares, you will deliver to me
the stock certificate(s) representing the Put Shares, fully endorsed for
transfer to me.
This letter agreement shall be binding upon and inure to the benefit of our
respective successors and permissible assigns, except that I shall not delegate,
assign or otherwise dispose of my duties under this Agreement without your prior
written consent. Any communication between us under this letter agreement shall
be to the respective addresses first set forth above and shall be deemed given
upon the earlier of deposit in the United States mail, postage fully prepaid, or
actual receipt. This letter agreement is the entire statement of the terms of
the agreement between us with respect to the matters set forth herein and shall
be governed by the laws of California, without regard to its conflict of laws
principles.
Sincerely,
/s/ Irwin Levy
- ---------------
Irwin Levy
Acknowledged and Agreed:
- -----------------------
/s/ W. David Sykes
- ------------------------
W. David Sykes
nStor Technologies, Inc. Completes
Initial Purchase Of Andataco Shares And Note
Raises $3.5 Million In Private Placement Of Preferred Stock
Management Expects Annualized Revenues To Exceed $140 Million Before Year-
End
LAKE MARY, Fla.--(BUSINESS WIRE)--June 9, 1999--nStor Technologies, Inc. (AMEX:
"NSO"), a leading manufacturer of information storage management solutions,
today announced that it has completed the purchase of approximately 75% of
Andataco, Inc. (OTC BB: "ANDA") and a note owed by Andataco in the amount of
$5,100,000, for a total purchase price of $10.4 million. The Andataco shares and
note were acquired from Mr. David Sykes, President of Andataco, Inc.
Terms of the acquisition included a cash payment of $500,000, along with the
issuance to Mr. Sykes of a 9.5% promissory note in the amount of $5.1 million
(due June 2004) and $4.7 million of preferred stock convertible into 1,551,000
shares of nStor common stock, based on a price of $3.00 per share. Mr. Sykes
also received three-year warrants which entitle him to purchase an additional
155,000 shares of nStor common stock at a price of $3.30 per share.
nStor also announced that the Company raised $3.5 million in working capital in
a private placement of newly-issued preferred stock (convertible into 1,166,667
shares of nStor common stock, based on a price of $3.00 per share) and
three-year warrants for the purchase of 116,667 shares of nStor common stock at
a price of $3.30 per share. A privately-owned company affiliated with H. Irwin
Levy, Chairman of nStor Technologies, Inc., purchased $1.5 million of preferred
stock in the private placement.
Headquartered in San Diego, California, Andataco, Inc. designs, manufacturers
and distributes information storage solutions based in its Application-Specific
Architecture for Windows NT and UNIX environments. For the fiscal year ended
October 31, 1998, the Company reported revenues of $77.5 million. With sales
offices and business affiliates in the U.S., Europe, Asia, Latin America, Canada
and Australia, Andataco markets its products worldwide to Fortune 1000 and
emerging technology companies.
nStor intends to acquire the remaining outstanding shares of Andataco, for an
amount to be determined by an independent valuation of the Andataco shares, in a
transaction which should be completed by September 30, 1999.
"We believe the combination of nStor's technology with Andataco's strong sales
organization, under the direction of David Sykes, will expand the revenues of
both companies," commented Lawrence Steffann, President of nStor Technologies,
Inc. "We are delighted that Mr. Sykes, under a three-year employment agreement,
will utilize his 20 years of sales experience in the information storage
industry to position the company to fully participate in its rapidly-growing
target markets."
<PAGE>
Mr. Sykes noted that "nStor's products, along with its newly-developed
AdaptiveRAID(R) technology, should provide a platform for long-term impressive
expansion in revenue and earnings for the combined companies."
Mr. Steffann estimated that "revenues for the combined companies should reach a
$120 million annualized rate during the third quarter of 1999 and should exceed
a $140 million annualized rate in the fourth quarter. Due to integration and
consolidation issues, it is difficult to project operating results for the third
quarter with any certainty. However, cash flow - as measured by EBITDA (earnings
before interest, taxes, depreciation and amortization) - is expected to be
positive in this year's third quarter and should approximate ten cents per
diluted share in the final quarter of the year. nStor's second quarter revenues
will substantially exceed first quarter levels, even though revenues were
adversely affected by delays in the delivery of our new storage products.
Deliveries commenced during the fourth week of May."
nStor Corporation, a wholly owned subsidiary of nStor Technologies, Inc. (AMEX:
"NSO"), is a leading global manufacturer and supplier of high availability,
high-performance information storage solutions, including external RAID
solutions, desktop storage system, advanced storage management software and
AdaptiveRAID(R) technology. nStor products are marketed through a worldwide
network of OEMs and distributors. nStor's home office is located in Lake Mary
(near Orlando), Florida, with remote sales offices located throughout the U.S.,
Europe, the Asia/Pacific-Rim and Latin America. nStor is a member of the Fibre
Channel Community (FCC), the Storage Networking Industry Alliance (SNIA) and the
RAID Advisory Board (RAB). Additional information about nStor and its products
can be found on the World Wide Web at http://www.nstor.com.
This press release includes statements that may constitute "forward-looking"
statements, usually containing the words "believe", "estimate", "project",
"expect" or similar expressions. These statements are made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements inherently involve risks and uncertainties that could
cause actual results to differ materially from the forward-looking statements.
Factors that would cause or contribute to such differences include, but are not
limited to, continued acceptance of the Company's products in the marketplace,
competitive factors, dependence upon third-party vendors, and other risks
detailed in the Company's periodic report filings with the Securities and
Exchange Commission. By making these forward-looking statements, the Company
undertakes no obligation to update these statements for revisions or changes
after the date of this release.
Contact:
nSTOR Corporation
Mark F. Levy, (561) 640-3133
or
RJ Falkner & Company, Inc.
Investor Relations Counsel, (800) 377-9893
