<PAGE>
1
Registration No. 333-__________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM S-3
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
---------------
nSTOR TECHNOLOGIES, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 95-2094565
(State of Incorporation) (I.R.S.
Employer Identification Number)
10140 Mesa Rim Road, San Diego, CA 92121 - (858) 453-9191
(Address and Telephone Number of Registrant's
Principal Executive Offices)
Jack Jaiven
100 Century Boulevard, West Palm Beach, FL 33417 - (561) 640-3136
(Name, Address and Telephone Number of Agent for Service)
Copies of communications to:
Donn A. Beloff, Esq
Akerman, Senterfitt & Eidson, P.A.
350 East Las Olas Boulevard - 16th Floor
Ft. Lauderdale, Florida 33301
(954) 463-2700
Approximate date of commencement of proposed sale to the public: From time
to time after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. __
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box.: X
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. __
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.__
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. __
<PAGE>
2
CALCULATION OF REGISTRATION FEE
Title of Amount to Proposed Proposed Amount of
each class be maximum maximum registratration
of securities registered aggregate aggregate fee
to be registered (1) price per offering
unit (3) price
________________ ____________ ___________ ___________ ________________
Common Stock (2) Up to $2.78 $17,291,600 $4,564.98
6,220,000
(1) In the event of a stock split, stock dividend, or similar transaction
involving the common stock of the Company, the number of shares registered
hereby shall be automatically increased pursuant to Rule 416 to cover the
additional shares of common stock.
(2) Represents shares issued in a private transaction.
(3) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457 under the Securities Act of 1933 based upon the
average of the high and low prices reported on the consolidated reporting
system for the American Stock Exchange on May 31, 2000 of $2.78.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
<PAGE>
3
Subject to Completion
Dated June 7, 2000
The information in this prospectus is incomplete and may be changed. The
selling security holders may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is effective. This
prospectus is not an offer to sell these securities and is not soliciting an
offer to buy these securities in any state where the offer or sale is not
permitted.
PRELIMINARY PROSPECTUS
6,220,000 SHARES
nSTOR TECHNOLOGIES, INC.
COMMON STOCK
------------------------------
nStor Technologies, Inc.
The selling security holders may use this
prospectus to resell up to 6,220,000 shares
of our common stock.
10140 Mesa Rim Road, San
Diego, California 92121
(858) 453-9191
We will not receive any of the proceeds from
the sale of the shares by the selling
security holders. However, we will receive
the sale price of any common stock that we
sell to Wishmasters Limited under the common
stock purchase agreement described in this
prospectus or upon the exercise for cash of
the stock purchase warrants held by
Wishmasters and Ladenburg Thalmann & Co. Inc.
We will pay the costs of registering the
shares under this prospectus, including
legal fees.
Our common stock is listed on
the American Stock Exchange
under the symbol "NSO". The
last reported sales price for
our common stock on the
American Stock Exchange on
June 6, 2000 was $3.25 per
share.
The selling security holders may offer shares
of common stock of nStor to purchasers in
transactions on the American Stock Exchange,
in negotiated transactions, or otherwise, or
by a combination of these methods. The
selling security holders may sell the shares
through broker-dealers who may receive
compensation from the selling security
holders in the form of discounts or
commissions. Wishmasters is an "underwriter"
within the meaning of the Securities Act of
1933 in connection with such sales.
This investment involves a high degree of risk. See "Risk Factors"
beginning on Page 5.
We may amend or supplement this Prospectus from time to time by filing
amendments or supplements as required. You should read the entire Prospectus and
any amendments or supplements carefully before you make your investment
decision.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
Prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
---------------------------------------------------
The date of this Prospectus is June __, 2000
<PAGE>
4
Table of Contents
Page
Where You Can Find More Information 1
The Company 2
Recent Developments 2
The Offering 4
Risk Factors 5
Use of Proceeds 11
The Common Stock Purchase Agreement 11
Selling Security Holders 18
Plan of Distribution 18
Legal Matters 20
Experts 21
<PAGE>
5
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the Securities and Exchange Commission. You may read and copy
any document we file at the SEC's public reference rooms in Washington, D.C.,
New York, New York and Chicago, Illinois. Please call the SEC at 1-800-SEC- 0330
for further information on the public reference rooms. Our SEC filings are also
available to the public at the SEC's web site at http://www.sec.gov.
The SEC allows us to "incorporate by reference" the information we file
with them, which means that we can disclose important information to you by
referring you to those documents. The information incorporated by reference is
considered to be part of this Prospectus, and later information filed with the
SEC will update and supersede this information. We incorporate by reference the
documents listed below and any future filings made with the SEC under Section
13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934 (the "Exchange
Act").
1. The Company's Annual Report filed on Form 10-K for the fiscal year ended
December 31, 1999 filed on April 14, 2000.
2. The Company's Notification of Late Filing on Form 12b-25
filed on March 31, 2000.
3. The Company's Quarterly Report on Form 10-Q for the period ended March 31,
2000 filed on May 15, 2000.
4. The description of the common stock contained in the Company's Registration
Statement filed on Form 8-A, as filed with the SEC on April 16, 1997,
pursuant to Section 12(b) of the Exchange Act.
You may request a copy of these filings, at no cost, by writing or
telephoning us at the following address:
Jack Jaiven
nStor Technologies, Inc.
100 Century Boulevard
West Palm Beach, Florida 33417
(561) 640-3136
You should rely only on information incorporated by reference or provided
in this Prospectus and any prospectus supplement. We have not authorized anyone
else to provide you with different information.
From time to time, information we provide or statements made by our
directors, officers or employees may constitute "forward- looking" statements
under the Private Securities Litigation Reform Act of 1995 and are subject to
numerous risks and uncertainties. Any statements made in this Prospectus,
including any statements incorporated herein by reference, that are not
statements of historical fact are forward-looking statements (including, but not
limited to, statements concerning the characteristics and growth of our market
and customers, our objectives and plans for future operations and products and
our liquidity and capital resources). Such forward-looking statements are based
on current expectations subject to uncertainties and other factors which may
involve known and unknown risks that could cause actual results of operations to
differ materially from those projected or implied. Further, certain
forward-looking statements are based upon assumptions about future events which
may not prove to be accurate. Risks and uncertainties inherent in forward
looking statements include, but are not limited to:
our future cash flows and ability to obtain sufficient financing;
timing and volume of sales orders;
level of gross margins and operating expenses;
lack of market acceptance of our new product lines;
price competition;
conditions in the technology industry and the economy in general;
legal proceedings;
material cost fluctuations;
inventory obsolescence;
our ability to manage our inventories through procurement
and utilization of component materials; and
historical results are not necessarily indicative of the
operating results for any future period.
For a further discussion of these and other significant factors to consider in
connection with forward-looking statements, see the discussion in this
Prospectus under the heading "RISK FACTORS".
<PAGE>
6
THE COMPANY
nStor Technologies, Inc. and our subsidiaries design, manufacture and sell
high-availability, high-performance Internet storage and customized Storage Area
Networking (SAN) solutions, including external RAID (Redundant Array of
Independent Disks) solutions (which we refer to as our "RAID Business"), tape
backup products and advanced storage management software solutions for the UNIX,
Windows NT and Linux markets. (UNIX, Windows NT and Linux are computer operating
systems.) We were incorporated as a Delaware corporation in 1959.
On May 31, 2000, we had 158 full-time employees. Our principal sales,
operations and executive headquarters are located at 10140 Mesa Rim Road, San
Diego, California 92121, telephone number (858) 453-9191. Our engineering and
marketing offices are located in Lake Mary, Florida.
RECENT DEVELOPMENTS
Effective January 17, 2000, Mr. Larry Hemmerich was appointed as our new
President and Chief Executive Officer and as a director. He replaces Lawrence F.
Steffann who resigned as President and director effective January 26, 2000. From
1992 to 1998, Mr. Hemmerich served as Executive Vice President of Data General
and was responsible for the development and management of Data Genera's Clariion
computer storage division. Most recently, Mr. Hemmerich served as General
Manager of the Software and SAN Management Operation of Hewlett-Packard's
Enterprise Storage Business Unit.
On January 19, 2000, we acquired substantially all of the assets of OneofUs
Company Limited for an aggregate purchase price of $2,850,000, consisting of
$250,000 cash and 776,000 shares of our common stock with an aggregate value of
$2,600,000 (based on the average market price of our stock during the ten (10)
trading days ended January 19, 2000). The shares were issued pursuant to
employment agreements and in connection with a confidentiality, noncompetition
and nonsolicitation agreement. We agreed to register the shares on a
Registration Statement on Form S-3. OneofUs was a Taiwan-based, privately-held
designer of high performance Fibre Channel RAID controllers and storage
solutions for open systems and the Storage Area Network market.
On January 20, 2000, we entered into a letter agreement with Harris Ravine,
the former Chief Executive Officer of our Andataco subsidiary, relating to the
termination of his employment. Pursuant to the agreement, we issued 80,000
shares of our common stock to Mr. Ravine, registered the shares on a
Registration Statement on Form S-3 and paid Mr. Ravine $10,000 in cash.
On January 26, 2000, we entered into a termination agreement with Lawrence
F. Steffann, our former President, relating to the termination of his
employment. Pursuant to the agreement, we issued 43,479 shares of our common
stock to Mr. Steffann, registered the shares on a Registration Statement on Form
S-3 and paid Mr. Steffann approximately $27,000 in cash.
On February 1, 2000, Mark F. Levy resigned as a director of the Company and
was replaced by Roger H. Felberbaum. Mr. Felberbaum is Senior Managing Director
at ING Baring and has served in this position since September 1997. Previously,
Mr. Felberbaum was Senior Managing Director of Furman Selz from October 1983
until September 1997.
At February 29, 2000 and March 31, 2000, we were not in compliance with the
minimum tangible net worth covenant of our principal credit facility. Effective
March 29, 2000, the lender agreed to waive the default for both periods.
Effective April 14, 2000, we agreed with the lender to amend certain terms of
the credit facility including an increase in the interest rate to prime plus
1.5% and new minimum net worth and net income covenants on a consolidated basis.
All other significant provisions of the credit facility remain the same.
Effective March 7, 2000, the employment of Mr. David Sykes, the former Vice
President Marketing and Sales of one of our operating subsidiaries, was
terminated.
Effective March 13, 2000, Mr. James Habuda was appointed as our new Vice
President, OEM and Indirect Sales. Mr. Habuda joins us from Adaptec/Distributed
Processing Technology ("DPT"). Adaptec recently acquired DPT, where Mr. Habuda
was Vice President OEM Sales from September 1988 until March 2000.
Effective March 13, 2000, Mr. Thomas Wrightson was appointed as our new
Vice President, Manufacturing and Services. Mr. Wrightson joins us from Storage
Technology Corporation where he was Director of Support Services Development and
Management where he held a number of management positions since 1991.
Effective March 21, 2000, Mr. Jonathan Ash was appointed as our new Vice
President, Marketing. Since 1979, Mr. Ash served in a number of sales and
marketing management positions for Unisys Corporation, including executive
positions in Europe. Most recently, he served as Director of Storage Marketing
and was responsible for all storage marketing in North America and for managing
new product rollouts.
On April 10, 2000, Mr. David Tweed was appointed as our new Vice President,
Solution Sales. Mr. Tweed has more than 20 years of sales and sales management
experience with computer storage companies and was most recently, from January
1999 until January 2000, Director of Western Area Solution Sales for Data
General's Clariion business unit. Mr. Tweed was Western Regional Sales Manger
for Sentryl Software from March 1998 until March 1999 and Western Regional Sales
Manager for Zitel from January 1997 until January 1998. Mr. Tweed was Southwest
Sales Manager for EMC from January 1994 until November 1996.
Effective April 12, 2000, H. Irwin Levy, the Chairman of the Board and one
of our principal stockholders, agreed to commit to a $2 million revolving line
of credit facility for us. Borrowings under that credit facility will bear
interest at 10% per annum. The credit facility will expire on the earlier of
April 30, 2001 or the date on which we execute our amended credit facility with
our principal lender, for which we have received a commitment letter.
On April 26, 2000, we issued 296,296 shares of our common stock in
consideration for the cancellation of a promissory note in the principal amount
of $1,000,000 issued by us which was scheduled to mature on September 5, 2001.
The number of shares issued was based on the principal amount of the promissory
note and the average of the closing prices of our common stock on the American
Stock Exchange on April 24 and 25, 2000. We agreed to register the shares on a
Registration Statement on Form S-3.
We and Wishmasters Limited signed a common stock purchase agreement dated
May 4, 2000 for the future issuance and purchase of our common stock. The
transaction closed on May 9, 2000. The stock purchase agreement establishes what
is sometimes termed an equity line of credit or an equity draw down facility. In
general, the draw down facility operates like this: the investor, Wishmasters,
committed up to $15 million to purchase our common stock over a twelve month
period. Once during each draw down pricing period, we may request a draw of up
to $5,000,000 of that money, subject to a formula based on average stock price
and average trading volume, setting the maximum amount of any request for any
given draw. The amount of money that Wishmasters will provide to us and the
number of shares we will issue to Wishmasters in return for that money is
settled on a weekly basis during a 22 day trading period following the draw down
request based on the formula in the stock purchase agreement. Wishmasters
receives a 7% discount to the market price for the 22 day period and we receive
the settled amount of the draw down less a 4% placement fee payable to the
placement agent, Ladenburg Thalmann & Co. Inc., which introduced Wishmasters to
us. Ladenburg Thalmann is not obligated to purchase any of our shares. See "The
Common Stock Purchase Agreement."
<PAGE>
7
THE OFFERING
Common stock outstanding as
of June 6, 2000 31,748,774 shares
Shares offered by selling
security holders 6,220,000 shares
Risk Factors The shares involve a high
degree of risk. Investors
should carefully consider the
information set forth under
"RISK FACTORS".
Use of Proceeds We will not receive any
proceeds from the sale of the
shares by the selling security
holders
Amex trading symbol NSO
-----------------------------
<PAGE>
8
RISK FACTORS
In addition to the other information in this Prospectus or incorporated
herein by reference, the following risk factors should be considered carefully
in evaluating our business before purchasing the shares offered in this
Prospectus.
We have experienced recent losses and may require additional financing to
satisfy our working capital needs
We have experienced net losses for the fiscal years ended December 31, 1997
($7,886,000), December 31, 1998 ($10,407,000) and December 31, 1999
($18,704,000), respectively. For the quarter ended March 31, 2000, we
experienced a loss of $2,925,000, excluding a $5,575,000 non-recurring gain on
the sale of certain assets. We also expect to have a net loss for the second
quarter ending June 30, 2000. At March 31, 2000, we had an accumulated deficit
of $55,783,000. There can be no assurance that we will be able to achieve or
maintain profitability on a quarterly or annual basis or that we will be able to
achieve revenue growth.
In late 1997, we determined that amounts available under our bank line of
credit would not be sufficient to satisfy our cash requirements and that, as a
result, additional debt and/or equity financing would be necessary. During the
period beginning in late 1997 and ending on March 31, 2000, we were able to
obtain approximately $26.3 million from private investors through the sale of
convertible preferred stock and common stock, the issuance of subordinated and
other notes and the exercise of warrants and options to purchase shares of
common stock. On January 10, 2000, we sold substantially all of the assets of
our wholly-owned subsidiary, Borg Adaptive Technologies, for $7.0 million cash,
net of approximately $500,000 of transaction costs. Of this amount,
approximately $1.6 million was used to repay short term borrowings from H. Irwin
Levy. Although we believe that amounts expected to be available from our bank
line of credit and our equity line of credit will be sufficient to satisfy our
presently contemplated working capital needs for the foreseeable future, we may
require additional capital beyond our currently forecasted needs. In addition,
any additional required capital may not be available on terms acceptable to us,
if at all, at such time or times as we might require.
We have, from time to time, been unable to comply with the financial covenants
of our bank lines of credit
From time to time, we have been unable to comply with certain of the
financial covenants of our bank lines of credit and have requested that our
lenders forbear from exercising the remedies available to them under such
circumstances. In each such case, our banks agreed with our request. In the
event that such events occur in the future and we are unsuccessful in our
negotiations with our lenders, we would be required to seek other sources of
capital to satisfy our obligations under our lines of credit.
At February 29, 2000 and March 31, 2000, we were not in compliance with the
minimum tangible net worth covenant of our principal credit facility. Effective
March 29, 2000, the lender agreed to waive the default for both periods.
Effective April 14, 2000, we agreed with the lender to amend certain terms of
the credit facility including an increase in the interest rate to prime plus
1.5% and new minimum net worth and net income covenants on a consolidated basis.
All other significant provisions of the credit facility remain the same.
We have a limited history of operating and integrating our acquired businesses
and most of our senior management team have recently joined us and have not
worked together in the past
A significant portion of our operating assets have been acquired during the
past year and most of our top executives joined us since the beginning of this
year. The success of our recent business combinations will depend in large part
on our ability to consolidate our operations, integrate departments, systems and
procedures and obtain business efficiencies, economies of scale and related cost
savings. The significant management challenges presented by such consolidation
and integration may prevent the desired cost savings. We may not be able to
successfully consolidate our business operations or achieve returns that would
justify our investment in our acquired businesses. This consolidation process
will require substantial time and attention on the part of our management. We
may not be able to successfully integrate the operations of these companies. If
we are unable to integrate or successfully manage the companies we have
acquired, our business, financial condition and results of operations could be
materially and adversely affected.
<PAGE>
9
We have experienced fluctuations in operating results
We have recently experienced significant period-to-period fluctuations in
our operating results. These fluctuations are due to product design,
development, manufacturing and marketing expenditures. If significant variations
were to occur between forecasts and actual orders with respect to our products,
we may not be able to reduce our expenses proportionately and operating results
could be adversely affected. Our revenues in any quarter are dependent on the
timing of product shipments as well as the status of competing product
introductions. Like many other high technology companies, a disproportionately
large percentage of quarterly sales often occur in the closing weeks of each
quarter. Any forward-looking statements about operating results made by members
of our management will be based on assumptions about the likelihood of closing
anticipated sales and other factors management considers reasonable based in
part on knowledge of performance in prior periods. The failure to consummate any
of those sales may have a disproportionately negative impact on our operating
results, given our relatively high fixed costs, and may thus prevent
management's projections from being realized.
We may be unable to attract and retain qualified employees
Our ability to provide high-quality products on a timely basis requires
that we employ an adequate number of skilled engineers and technicians.
Accordingly, our ability to increase our productivity and profitability will be
limited by our ability to attract and retain skilled personnel. We, like many of
our competitors, are currently experiencing shortages of qualified personnel. We
may not be able to maintain an adequate skilled labor force necessary to operate
efficiently and to support our growth strategy and our labor expenses may
increase as a result of a shortage in the supply of skilled personnel.
Rapid technological and customer preference changes - we may be unable to keep
pace with the rapid changes in our industry
The open systems data storage market in which we operate is characterized
by rapid technological change, frequent new product introductions and evolving
industry standards. Customer preferences in that market are difficult to predict
and changes in those preferences could render our current or future products
unmarketable. The introduction of products embodying new technologies by our
competitors and the emergence of new industry standards could render existing
products as well as new products being introduced obsolete and unmarketable. For
example, if customers were to turn away from open systems computing, our
revenues would decline dramatically.
Our success depends upon our ability to address the increasingly
sophisticated needs of customers, to enhance existing products and to develop
and introduce, on a timely basis, new competitive products (including new
software and hardware and enhancements to existing software and hardware) that
keep pace with technological developments and emerging industry standards. If we
cannot successfully identify, manage, develop, manufacture or market product
enhancements or new products, our business will be materially and adversely
affected.
Intense competition - the computer storage market is highly
competitive
The storage system market is intensely competitive. We compete with
traditional suppliers of computer systems such as Hewlett-Packard, Sun
Microsystems, IBM, SGI, Compaq Corporation, Hitachi, Digital Equipment
Corporation, and Dell Computer Corp., which market storage systems as well as
other computer products, and which seem to have become more focused on storage
recently. For example, Data General was recently acquired by EMC Corporation.
EMC is the largest independent seller of data storage systems and software. We
also compete against independent storage system suppliers to the high-end market
including, but not limited to, Box Hill Systems, Artecon Inc., EMC Corporation,
including its Clariion division, StorageTek, Network Appliance, Inc., LSI Logic
Corporation, Ciprico Inc., MTI Technologies, Inc. and Procom Technology Inc. In
providing tape backup, we compete with value-added suppliers of tape-based
storage systems such as Datalink Corporation, MTI Technologies, Inc., Dallas
Digital, Cranel, Inc. and others.
Many of these competitors are significantly larger than us, and have
significantly greater financial, technical, marketing, purchasing and other
resources than us, and as a result may be able to respond more aggressively to
new or emerging technologies and changes in customer requirements, or devote
greater resources to the development, promotion and sale of products than us, or
to deliver competitive products at a lower end-user price.
Increased competition is likely to result in price reductions, reduced
operating margins and loss of market shares, any of which could have a material
adverse effect on our business, operating results or financial condition. In
fact, competitive pricing pressures have had, and may continue to have an
adverse effect on our revenues and earnings.
If we are unable to develop and market products to compete with the
products of competitors, our business will be materially adversely affected. In
addition, if major customers who are also competitors cease purchasing our
products so that they can concentrate on sales of their own products, our
business could be adversely affected.
<PAGE>
10
We are a party to litigation which could adversely our financial
condition
In June and August 1996, we and two of our then directors were served with
two separate complaints filed in the Supreme Court of the State of New York,
County of Nassau, in which the plaintiffs claim to have had contractual and
proprietary interests in the prospect of a transaction to purchase certain net
assets acquired by us. The plaintiffs seek compensatory damages, punitive
damages, and equitable relief for alleged interference with the plaintiffs'
alleged rights and for alleged breach of contract. Our counsel believes that we
have good defenses to both claims and that we will not incur any material
liability. We are unaware of any facts that would support any of the plaintiffs'
claims and, accordingly, we believe that the claims are without merit. An
unfavorable outcome in such litigation could have an adverse effect our
financial condition.
Lack of long term contracts - delays or cancellations of customer orders could
materially adversely affect our operating results
We generally do not enter into long-term purchase commitments with our
customers and customers generally have certain rights to extend or to delay the
shipment of their orders, as well as the right to return products and cancel
orders under some circumstances. The cancellation or rescheduling of orders
placed by our customers or the return of products shipped to them, could
materially and adversely affect our business.
Product defects - our business will materially suffer if we encounter
significant product defects
Storage system products like those offered by us may contain undetected
software errors or failures when first introduced or as new versions are
released. We cannot be certain that, despite testing, errors will not be found
in new products after commencement of commercial shipments.
Our standard warranties provide that if a system does not function to
published specifications we will repair or replace the defective component
without charge. Significant warranty costs could have a material adverse effect
on our business.
Availability of competing products - sales of competing products by distributors
and VARs could materially adversely affect our sales
In the United States, we sell our products both through a direct sales
force and through value-added resellers (VARs). Our distributors and VARs may
also carry competing product lines, and could reduce or discontinue sales of our
products, which could have a material adverse effect on our operating results.
Lengthy sales cycles - we depend on large orders and upon sales which may have
lengthy cycles
Customer orders can range in value from a few thousand dollars to over a
million dollars. The length of time between initial contact with a potential
customer and sale of a product, or "sales cycle", also can vary greatly and can
be as long as three to twenty-four months. This is particularly true for the
sale and installation of complex, turnkey solutions, which often are sold
directly to end users. Our revenue is likely to be affected by the timing of
larger orders, which makes it difficult for us to predict such revenue. Revenue
for a quarter could be reduced if large orders forecasted for a certain quarter
are delayed or are not realized. The factors that could delay or defer an order
include:
time needed for technical evaluations by customers;
customers budget restrictions and changes to budgets
during the course of a sales cycle;
customer internal review and testing procedures; and
engineering work needed to integrate a storage solution
with a customer's system.
We may not be able to successfully protect our patents and other intellectual
property rights, and may be subject to claims of infringement by others
We currently hold various patents on our products. In addition, we rely on
a combination of trade secrets, copyrights, trademarks, domain names and
employee and third-party nondisclosure agreements to protect our intellectual
property rights. The steps taken to protect our rights may not be adequate to
prevent misappropriation of our technology or to preclude competitors from
developing products with features similar to our products. Furthermore, in the
future, third parties may assert infringement claims against us or with respect
to our products for which we have indemnification obligations to certain of our
customers. Asserting our rights or defending against third-party claims could
involve substantial expense which could have a material adverse effect on our
operating results. In the event a third party were successful in a claim that
one of our products infringed the third party's proprietary rights, we may have
to pay substantial damages or royalties, remove that product from the
marketplace or expend substantial amounts in order to modify the product so that
it no longer infringes such proprietary rights, any of which could have a
material adverse effect on our operating results.
<PAGE>
11
Sole source and key suppliers - the loss of one or more suppliers could
adversely affect our ability to obtain key components for products
We rely on other companies to supply certain key components of our
products. Our products are typically designed to operate with unique components
that are available from a single source. For example, certain of our products
are dependent upon controllers designed by one of our suppliers. Although we can
use other suppliers, the delay in integrating these parts into our solutions
will increase product costs. Other components, while not dependent on one
source, may, from time to time, be in short supply or unavailable for a period
of time while alternative sources can be identified. Modification to the
particular products, requalification of the products with applicable regulatory
agencies, and additional testing to assure software and hardware is compatible
can result in lost or deferred revenue as well as higher product costs.
In addition, we often resell subsystems, software and services from others.
This leaves us vulnerable to inadequate supply, uneven allocation in times of
shortage, delays in order fulfillment, and contract terminations. For example,
we have resold Clariion's Disk Storage product line. Data General, the parent of
Clariion, was recently acquired by EMC, a significant acquisition in this
industry. EMC may not continue to use indirect selling channels, or we may not
be selected by EMC, assuming EMC chooses to continue the Clariion selling model.
The loss of our relationship with Clariion could have a material impact on our
revenues and customer base. The percentage of our revenues attributable to the
sale of Clariion's product line in 1999 was 17.1%.
Concentrated customer base - an economic downturn of major customers or
geographical area in which we concentrate could materially adversely affect
revenues
We operate predominantly in one business segment, information storage
solutions, including external RAID subsystems. A large percentage of our revenue
comes from the sale of products to a small number of significant clients. Sales
to two customers, Silicon Graphics, Inc. (SGI) and Intel, accounted for 15.1%
and 11%, respectively, of our 1999 revenues.
During the second quarter of 1999, we entered into an original equipment
manufacturer, or OEM, agreement to supply high- performance RAID storage
enclosures to SGI, a major server manufacturer. The initial term of the
arrangement was expected to be for three years. Between May and October 1999,
sales to SGI totaled approximately $6,000,000. In the third quarter of 1999, SGI
decided to phase out their Windows NT product to which our storage systems were
attached. As a direct result, actual shipments to SGI subsequent to October 1999
have been minimal and are not expected to increase in the near future.
An economic downturn in any industry or geographical area targeted by us,
or the loss of one or more customers, particularly a significant customer, could
result in a material decrease in revenues, thereby adversely affecting our
operating results.
Narrow market - a decline in market acceptance of Unix Systems, Windows NT or
changes in Sun Microsystems products or policies could materially adversely
affect our business
Substantially all of our revenues to date have been concentrated in the
UNIX and Windows NT marketplace. A large portion of our revenues are associated
with versions of UNIX and Windows NT manufactured by Sun Microsystems, Inc. If
Sun Microsystems were to change its policy of supporting open systems computing
environments and if our products were thereby rendered incompatible with Sun
Microsystems' products, our business, financial position and results of
operations could be materially and adversely affected.
The price of our common stock has been, and may continue to be,
volatile
Our common stock has experienced in the past, and could experience in the
future, substantial price volatility as a result of a number of factors,
including:
quarter to quarter variations in the actual or our
anticipated financial results;
announcements by us, our competitors or our customers;
government regulations; and
developments in the industry.
<PAGE>
12
In addition, the stock market has experienced extreme price and volume
fluctuations which have affected the market price of many technology companies
in particular and which have at times been unrelated to the operating
performance of the specific companies whose stock is traded. Broad market
fluctuations and general economic conditions may adversely affect the market
price of our common stock.
We may not have access to sufficient funding to support our
operations
We have expended and will continue to be required to expend substantial
funds to continue research and development, and for other aspects of our
business. Although we believe that we have access to resources sufficient to
fund our operations for at least the next twelve months, we may need or elect to
raise additional capital. Our capital requirements will depend on many factors,
including:
the problems, delays, expenses and complications
frequently encountered by technology companies;
the progress of our research, development and product
testing programs;
the success of our sales and marketing programs;
costs in filing, prosecuting, defending and enforcing
intellectual property rights;
the extent and terms of any collaborative research,
manufacturing, marketing or other arrangements; and
changes in economic, regulatory or competitive
conditions or our planned business.
Estimates about the adequacy of funding for our activities are based on certain
assumptions, including the assumption that research, development and testing
relating to our products under development can be conducted at projected costs
and within projected time frames and that such products can be successfully
marketed.
To satisfy our capital requirements, we may seek to raise funds in the
public or private capital markets. Our ability to raise additional funds in the
public or private markets will be adversely affected if the results of our
ongoing or future research and development programs are not favorable. We may
seek additional funding through corporate collaborations and other financing
vehicles. Such funding may not be available, or if available, it may not be
available on acceptable terms. If adequate funds are not available, we may be
required to curtail our operations significantly, or we may be required to
obtain funds through arrangements with future collaborative partners or others
that may require us to relinquish rights to some or all of our technologies or
products under development. If we are successful in obtaining additional
financing, the terms of the financing may have the effect of diluting or
adversely affecting the holdings or the rights of the holders of our common
stock.
Future acquisitions could adversely affect our stock price or
disrupt our operations
We may pursue acquisitions of complementary technologies, product lines or
businesses. Future acquisitions could result in dilutive issuances of equity
securities and the incurrence of additional debt and amortization expenses
related to goodwill and intangible assets that could adversely affect our
operating results. In addition, gross margins of acquired products, necessary
product or technology development expenditures and other factors that may be
involved in any such acquired business could result in dilution to our earnings.
Acquisitions also may involve numerous other risks, including:
difficulties in the assimilation of the operations and
products of the acquired business;
dependence on new products and processes;
the diversion of management's attention from other
business concerns;
risks of entering markets in which we have no or
limited direct prior experience; and
the potential loss of key employees of the acquired business and
difficulties in attracting additional key employees necessary to
absorb added management responsibilities.
No assurance can be given as to the effect of any future acquisition on our
business or operating results.
The Year 2000 issue could disrupt our business
Many computer systems, software programs and other equipment with embedded
chips or processors use only two digits rather than four to define the
applicable year. As a result, they may be unable to process accurately certain
data, during or after the year 2000. As a result, business and governmental
entities are at risk for possible miscalculations or systems failures causing
disruptions in their business operations. This is commonly known as the Year
2000 or Y2K issue. The Y2K issue concerns not only information systems used
solely within a company, but also concerns third parties, such as customers,
vendors and creditors, using information systems that may interact with or
affect a company's operations.
<PAGE>
13
If needed remediations and conversions to the information systems are not
made on a timely basis by our materially- significant customers or vendors, we
could be affected by business disruption, operational problems, financial loss,
legal liability to third parties and similar risks, any of which could have a
material adverse effect on our operations, liquidity or financial condition.
Factors which could cause material differences in results, many of which are
outside of our control, include, but are not limited to, the accuracy of
representations by manufacturers of our information systems that their products
are Y2K compliant, the ability of their companies' customers and vendors to
identify and resolve their own Y2K issues, and our ability to respond to
unforeseen Y2K complications.
As of the date of this Prospectus, we have not experienced any material
disruption in our business or operations as a result of Y2K issues. However,
there is no assurance that we will not experience disruptions in the future.
Shares eligible for future sale by our current security holders may adversely
affect our stock price
If our current security holders sell substantial amounts of our common
stock, including shares issued upon the exercise of outstanding options and
warrants or the conversion of outstanding preferred stock, in the public market
following this offering, then the market price of our common stock could fall.
Restrictions under the securities laws and certain lock-up agreements limit the
number of shares of common stock available for sale in the public market. Except
as provided below, substantially all of the shares of the common stock
(31,748,774 shares as of May 31, 2000) are freely tradable without restriction
or further registration under the Securities Act, unless such shares are held by
our "affiliates" as that term is defined in Rule 144 under the Securities Act.
Approximately 16,259,252 shares of common stock (including 5,588,666 shares
issuable on the exercise of outstanding options and warrants or the conversion
of outstanding preferred stock) are held by officers and directors and are
deemed restricted securities within the meaning of Rule 144. Restricted
securities may be sold in the public market only if they have been registered
under the Securities Act or if their sales qualify under Rule 144 or another
available exemption from the registration requirements of the Securities Act.
All of the Shares offered for sale in this Prospectus will be freely tradable if
sold using this Prospectus. See "SELLING SECURITY HOLDERS".
The sale of stock pursuant to the equity line of credit may substantially dilute
the interests of other security holders
The shares issuable to Wishmasters pursuant to the equity line of credit
will be issued at a 7% discount to the average daily price of our common stock.
Accordingly, the shares of common stock then outstanding will be diluted.
Depending on the price per share of our common stock during the twelve month
period of the equity line of credit, we may need to register additional shares
for resale to access the full amount of financing available, which could have a
further dilutive effect on the value of our common stock.
The sale of material amounts of our common stock could reduce the price of our
common stock and encourage short sales
As we sell shares of our common stock to Wishmasters pursuant to the equity
line of credit and then Wishmasters sells the common stock, our common stock
price may decrease due to the additional shares in the market. As the price of
our common stock decreases, and if we decide to draw down on the equity line of
credit, we will be required to issue more shares of our common stock for any
given dollar amount invested by Wishmasters, subject to a designated minimum put
price specified by us. This may encourage short sales, which could place further
downward pressure on the price of our common stock.
USE OF PROCEEDS
We will not realize any proceeds from the sale of the common stock by the
selling security holders; rather, the selling security holders will receive
those proceeds directly. However, we will receive cash infusions of capital if
and when Wishmasters purchases our common stock in accordance with the stock
purchase agreement and upon the exercise of warrants held by Wishmasters and
Ladenburg Thalmann. We intend to use the proceeds from the sale of common stock
to Wishmasters for acquisitions and general working capital purposes.
THE COMMON STOCK PURCHASE AGREEMENT
Summary
We and Wishmasters, a British Virgin Islands corporation, signed a common
stock purchase agreement dated May 4, 2000 for the future issuance and purchase
of our common stock. The transaction closed on May 9, 2000. The stock purchase
agreement establishes what is sometimes termed an equity line of credit or an
equity draw down facility. In general, the draw down facility operates like
this: the investor, Wishmasters, committed up to $15 million to purchase our
common stock over a twelve month period. Once per draw down period, we may
request a draw of up to $5,000,000 of that money, subject to a formula based on
average stock price and average trading volume, setting the maximum amount of
any request for any given draw. The amount of money that Wishmasters will
provide to us and the number of shares we will issue to Wishmasters in return
for that money is settled on a weekly basis during a 22 day trading period
following the draw down request based on the formula in the stock purchase
agreement. Wishmasters receives a 7% discount to the market price for the 22 day
period and we receive the settled amount of the draw down less a 4% placement
fee payable to the placement agent, Ladenburg Thalmann & Co. Inc., which
introduced Wishmasters to us. Ladenburg Thalmann is not obligated to purchase
any of our shares.
<PAGE>
14
The facility is based on a "use-it-or-lose" principle. We are under no
obligation to request a draw for any period. However if we do not request a draw
for a given period, we may never be able to draw those funds again. The
aggregate total of all draws cannot exceed $15 million.
In lieu of providing Wishmasters with a minimum draw down commitment, we
granted Wishmasters a warrant to purchase 100,000 shares of our common stock,
exercisable for a period of three years at any time after the earlier of 45 days
after the effective date of the registration statement of which this prospectus
is a part or 120 days from the closing date of May 9, 2000. The exercise price
is equal to 120% of the average of the closing prices of the common stock on the
five trading days before the closing date of May 9, 2000. The average of the
closing prices of our shares for that five day period was $3.00. Thus the
exercise price for the warrant is $3.60.
We also issued to Ladenburg Thalmann a stock purchase warrant for a total
of 120,000 of our shares of common stock with an exercise price of 120% of the
average of the closing prices of our common stock on the five trading days
before the closing date of May 9, 2000 or $3.60. The warrant issued to Ladenburg
Thalmann is exercisable any time between May 9, 2000 and May 9, 2003.
The Draw Down Procedure and the Stock Purchases
We may request a draw down by faxing a draw down notice to Wishmasters,
setting out the amount of the draw down we wish to exercise and the minimum
threshold price, if any, at which we are willing to sell the shares.
The minimum draw down amount is $250,000. The maximum is $5,000,000 subject
to the following limiting formulas:
Maximum amount of = 20% of average stock price
draw down multiplied by average trading
volume multiplied by 22
Where
Average Stock Price = Average of the daily volume-weighted
price of our shares for the 22 trading days before
the draw down notice date
Average Trading = Average daily trading volume for
Volume the 45 trading days before the draw
down notice date.
The next 22 trading days immediately following the draw down notice are
used to determine the actual amount of money Wishmasters will provide and the
number of shares we will issue in return. The amount of the draw and the number
of shares to be issued is determined on a weekly basis during the 22 trading
days and is calculated based on the following formula:
Number of shares of common stock = Sum over each of the 22
trading days of 1/22 of the
draw down amount divided by 93% of the
volume-weighted average daily price for
our shares on each trading day.
If the daily price for any given trading day during the draw down period is
below the threshold price we set in the draw down notice, then that day is not
included in the calculation of the number of shares to be issued and the draw
down amount that Wishmasters is to pay to us is correspondingly reduced by 1/22
for that day. Thus, if the daily price for that day is below the threshold
price, we will not issue any shares and Wishmasters will not purchase any shares
for that day.
The following is an example of the calculation of the draw down amount and
the number of shares to be issued to Wishmasters in connection with that draw
down based on certain assumptions.
Sample draw down amount calculation
We provide a draw down notice to Wishmasters that we wish to draw down
$3,000,000, which is the amount we intend to request in our initial
draw down request.
<PAGE>
15
The average of the daily volume weighted average prices of our common
stock for 22 trading days prior to the draw down notice is $3.75.
The average daily trading volume for the 45 trading days prior to the
draw down notice is 175,000 shares.
The maximum dollar amount that can be drawn down is: 20% of $3.75
multiplied by 175,000 multiplied by 22 or $2,887,500.
On these assumed facts, we could draw $2,887,500 out of the $3,000,000
requested in the draw down notice. Suppose that our notice specifies a threshold
amount of $3.25, below which we will not sell any shares to Wishmasters during
this draw down period. If the volume-weighted average daily price of our common
shares for each of the 22 days following the draw down notice is at least $3.25,
we will be able to draw the maximum $2,887,500 amount. If on the other hand the
volume-weighted average daily price of our common shares is below $3.25 on three
of those 22 days, for example, the $2,887,500 would be reduced by 1/22 for each
of those days and our draw down amount would be 19/22 of $2,887,500, or
$2,493,750.
Sample calculation of number of shares
Assume that the maximum draw down amount for the draw down period is
$2,887,500 and assume that the daily volume weighted average price for our
shares is as set out in the table below. The number of shares to be issued based
on any trading day during the draw down period is calculated from the formula:
(1/22 of the draw down amount) divided by (93% of the daily
price).
For the first trading day in the example in the table below, the
calculation is as follows:
(1/22 of $2,887,500) divided by (93% of $4.00 per share) or
35,282 shares.
The number of shares to be issued for the draw down period in the example
is calculated as follows:
for each trading day in the 22 day period, the number of shares to be
issued is based on the average daily price of our shares for that day
and calculated using the formula above; and
the number of shares to be issued for each of the 22 trading days is
then totaled to arrive at the number of shares to be issued to
Wishmasters for the purchase price of $2,887,500, the draw down
amount.
Trading Day Average Daily 1/22 of Draw Number of
Stock Price* Down Shares to be
Amount of Issued Based
$2,887,500 on
that Trading
Day
________________________________________________________________
1 $4.00 131,250 35,282
2 3.50 131,250 40,322
3 3.25 131,250 43,424
4 3.25 131,250 43,424
5 3.00 - **
6 2.9375 - **
7 3.125 - **
8 3.25 131,250 43,424
9 4.00 131,250 35,282
10 3.8125 131,250 37,017
11 4.00 131,250 35,282
12 4.25 131,250 33,206
13 4.25 131,250 33,206
14 4.00 131,250 35,282
15 4.125 131,250 34,215
16 4.25 131,250 33,206
17 4.50 131,250 31,362
18 4.50 131,250 31,362
19 5.00 131,250 28,225
20 5.00 131,250 28,225
21 5.00 131,250 28,225
22 5.625 131,250 25,089
_________ ________
TOTAL 2,493,750 655,060
<PAGE>
16
* The share prices are illustrative only and should not be interpreted
as a forecast of share prices or the expected or historical volatility
of the share prices of our common stock.
** Excluded because the volume-weighted average daily price is below the
threshold specified in our hypothetical draw down notice.
In this fictitious example, and accounting for the three days where no
shares were sold to Wishmasters, we would issue 655,060 shares for this draw
down period. We would receive $2,493,750 less the 4% fee to the placement agent
or $2,394,000.
The delivery of the requisite number of shares and payment of the draw is
effected through an escrow agent, Epstein, Becker & Green, P.C. of New York. The
escrow agent pays 96% of the draw to us and 4% to Ladenburg Thalmann, our
placement agent, in satisfaction of placement agent fees.
Only one draw down can occur during this 22 day draw down period.
Necessary Conditions Before Wishmasters Is Obliged to Purchase Our Shares
The following conditions must be satisfied before Wishmasters is obligated
to purchase the common stock that we wish to sell:
A registration statement for the shares we will be issuing must be
declared effective by the Securities and Exchange Commission and must
remain effective and available as of the draw down settlement date for
making resales of the common stock purchased by Wishmasters;
There can be no material adverse change in our business, operations,
properties, or financial condition;
We must not have merged or consolidated with or into another company
or transferred all or substantially all of our assets to another
company unless the acquiring company has agreed to honor the stock
purchase agreement;
No statute, rule, regulation, executive order, decree, ruling or
injunction may be in effect which prohibits consummation of the
transactions contemplated by the stock purchase agreement;
No litigation or proceeding involving Wishmasters or their affiliates,
can be pending, nor any investigation by any governmental authority
threatened against them which seeks to restrain, prevent or change the
transactions contemplated by the stock purchase agreement or seeking
damages in connection with such transactions; and
Trading in our common stock must not have been suspended by the
Securities and Exchange Commission or the American Stock Exchange nor
shall minimum prices have been established on securities whose trades
are reported by the American Stock Exchange.
On each draw down settlement date for the sale of common stock, we must
deliver an opinion from our counsel about these matters.
A further condition is that Wishmasters may not purchase more than 19.9% of
our common stock issued and outstanding on May 9, 2000, the closing date under
the stock purchase agreement, without obtaining approval from our shareholders
for such excess issuance. In addition, the stock purchase agreement does not
permit us to draw down funds if the issuance of shares of common stock to
Wishmasters pursuant to the draw down would result in Wishmasters and its
affiliates owning more than the lesser of 9.9% of our outstanding common stock
or 500,000 shares of our common stock.
Restrictions on Our Future Financings
The stock purchase agreement limits our ability to raise money by selling
our securities for cash at a discount to the current market price for at least
twelve months. Specifically, we may not sell our securities for cash at a
discount to current market price until the earlier of
twelve months from ___________________, 2000, the
effective date of the registration statement of which
this prospectus is a part, or
<PAGE>
17
thirty days after Wishmasters has purchased the maximum
of $15 million worth of common stock from us, or
thirty days after termination of the stock purchase
agreement.
There are important exceptions to this limitation. We can sell our shares
for cash at a discount to the current market price:
in a registered public offering of our securities
underwritten by one or more established investment
banks;
in one or more private placements where the purchasers
do not have registration rights;
under any employee benefit plan approved by our
shareholders;
under any compensatory plan for a full-time employee or
key consultant;
in connection with a strategic partnership or other
business transaction, the principal purpose of which is
not simply to raise money; or
in a transaction for which Wishmasters has given its
written approval.
The Warrants Issued to Wishmasters
Under the stock purchase agreement, we granted Wishmasters a warrant to
purchase 100,000 shares of our common stock, exercisable for a period of three
years at any time after the earlier of 45 days after the effective date of the
registration statement of which this prospectus is a part or 120 days from the
closing date of May 9, 2000. The exercise price is equal to 120% of the average
of the closing prices of the common stock on the five trading days before the
closing date of May 9, 2000. The average of the closing prices of our shares for
that five day period was $3.00. Thus the exercise price for the warrant is
$3.60.
Costs of Closing the Transaction
At the closing of the transaction on May 9, 2000, we delivered the warrant
for the 100,000 shares of common stock and the requisite opinion of counsel to
Wishmasters and paid the escrow agent, Epstein Becker & Green P.C. $35,000,
consisting of $5,000 for Wishmasters's legal, administrative and escrow costs
and $30,000 as a non-accountable expense allowance. Ladenburg Thalmann also
received warrants for a total of 120,000 of our shares of common stock at an
exercise price of 120% of the average of the closing prices for our shares on
the five trading days before May 9, 2000 or $3.60. Ladenburg Thalmann is not
obligated to purchase any of our shares pursuant to the warrant.
Termination of the Stock Purchase Agreement
Wishmasters may terminate the equity draw down facility under the stock
purchase agreement if any of the following events occur:
we suffer a material adverse change in our business,
operations, properties, or financial condition;
our common stock is delisted from the American Stock Exchange unless
the delisting is in connection with the listing of such shares on a
comparable stock exchange in the United States;
we file for protection from creditors;
we complete any of the financing transactions
prohibited under the stock purchase agreement;
the registration statement of which this prospectus is
a part is not effective by August 31, 2000; or
our officers and directors own less than 10% of our
outstanding shares.
<PAGE>
18
Indemnification of Wishmasters
Wishmasters is entitled to customary indemnification from us on any losses
or liabilities suffered by it based upon material misstatements or omissions
contained in the registration statement and the prospectus, except as they
relate to information supplied by Wishmasters to us for inclusion in such
registration statement and prospectus.
Wishmasters' Resale of the Common Stock
Wishmasters has agreed that its trading and distribution activities with
respect to the common stock will be in compliance with all applicable United
States state and federal securities laws, rules and regulations, and the rules
and regulations of the American Stock Exchange. All sales by Wishmasters must be
made in compliance with Regulation M under the Securities and Exchange Act of
1934.
To permit Wishmasters to resell the common stock issued to it under the
stock purchase agreement or under the warrant, we agreed to register those
shares and to maintain that registration. To that end, we will prepare and file
such amendments and supplements to the registration statement and the prospectus
as may be necessary in accordance with the Securities Act and the rules and
regulations promulgated thereunder, in order to keep it effective until the
earlier of any of the following dates:
the date that none of the shares of common stock covered by the
registration statement of which this prospectus is a part are or may
become issued and outstanding;
the date that all of the shares of common stock covered by the
registration statement of which this prospectus is a part have been
sold pursuant to the registration statement;
the date that all of the shares of common stock have been otherwise
transferred to persons who may trade such shares without restriction
under the Securities Act of 1933 and we have delivered new
certificates or other evidences of ownership of such common stock
without any restrictive legend; or
the date that all of such shares of common stock may be sold without
any time, volume or manner limitations under Rule 144(k) or similar
provision then in effect under the Securities Act of 1933 in the
opinion of our counsel.
The Number of Shares We Will Issue to Wishmasters
The number of shares of common stock that we will issue to Wishmasters
depends on four key factors:
the number of draw downs we exercise;
the average trading volumes for our common stock for
the 45 trading days before each draw down period;
the average stock price for our common stock for the 22
trading days before each draw down period; and
the average daily prices for our common stock on each of the 22 days
during a draw down period.
The fewer the number of draw downs we exercise, the fewer the shares we
will issue to Wishmasters. The stock purchase agreement provides for 1 draw down
in each draw down period consisting of 22 trading days. Thus, any decision by us
to delay or forego any draw down opportunity may result in our being unable to
exercise all draw downs available in the 12 month period.
The average stock price and the average trading volume prior to a draw down
period determine the maximum amount of the draw down for that period. A decline
in the trading volume or price of our stock may result in a reduction in the
amount of money we are able to draw down and a corresponding reduction in the
number of shares we must issue for that period.
The average daily price for each of the 22 trading days within a draw
period and the draw down amount determine the number of shares we will issue to
Wishmasters. Wishmasters will purchase those shares at a 7% discount to the
average daily price.
<PAGE>
19
For any given draw down period, the lower the average daily price, the more
shares of common stock Wishmasters will receive for the draw down amount. The
table in the section of this prospectus entitled "The Common Stock Purchase
Agreement" and under the headings "The Draw Down Procedure and the Stock
Purchases" and "Sample Calculation of Number of Shares" illustrates how a change
in the daily stock price can affect the number of shares issued for a constant
amount of draw down. This table uses a constant draw down amount of $131,250 for
each day. When the stock price goes down, the number of shares issued goes up.
Conversely, when the stock price goes up, the number of shares issued goes down.
However, lower average daily prices through the term of the stock purchase
agreement may not necessarily have the effect of substantially increasing the
number of shares issued. Lower stock prices during one draw period will reduce
the average stock price for the next draw down period. Assuming relatively
constant trading volumes, this reduction may limit the draw down amount and the
number of shares we can issue for that next draw down period.
Based on a review of our trading volume and stock price history and a
consideration of the factors above, we are registering 6,000,000 shares of
common stock for possible issuance under the stock purchase agreement, 100,000
shares underlying the warrant for common stock already delivered to Wishmasters,
and 120,000 shares underlying the warrant for common stock already delivered to
Ladenburg Thalmann.
In order to comply with the listing requirements of the American Stock
Exchange, we may not issue more than 6,318,000 shares, which is 19.9% of our
issued and outstanding common stock on May 31, 2000, without the approval of our
shareholders. In the event that we wish to draw amounts under the stock purchase
agreement which would cause an issuance of more than 19.9% of our issued and
outstanding shares, we must receive shareholder approval prior to any such draw
down.
SELLING SECURITY HOLDERS
Common stock registered for resale under this prospectus constitutes 19.6%
of our issued and outstanding common stock on May 31, 2000.
Wishmasters
Wishmasters is engaged in the business of investing in publicly-traded
equity securities for its own account. Wishmasters's principal offices are
located at Aeulestrasse 74, Vaduz, Liechtenstein. Investment decisions for
Wishmasters are made by its Board of Directors, consisting of Mr. Hans Gassner,
Dr. Alex Wiederker and Dr. Kurt Alig.
Wishmasters does not own any of our common stock or any other of our
securities as of the date of this prospectus, and other than its obligations to
purchase common stock under the stock purchase agreement and the warrant for
100,000 shares issued to it on May 9, 2000, it has no other commitments or
arrangements to purchase or sell any of our securities. There are no business
relationships between Wishmasters and us other than the stock purchase
agreement. Assuming that we fully utilize the $15 million available in the stock
purchase agreement and that Wishmasters sells all shares it acquired under that
agreement or upon exercise of the warrant, Wishmasters will no longer hold any
of our common stock.
Ladenburg Thalmann & Co. Inc.
Ladenburg Thalmann & Co. Inc. has acted as placement agent in connection
with the stock purchase agreement. There are no business relationships between
Ladenburg Thalmann and us other than in connection with the stock purchase
agreement. This prospectus covers 120,000 shares of common stock issuable upon
exercise of warrants we have issued to Ladenburg Thalmann as a placement fee for
introducing us to Wishmasters. Those warrants are exercisable at $3.60 per share
and expire May 9, 2003. The decision to exercise any warrants issued, and the
decision to sell the common stock issued pursuant to the warrants, will be made
by Ladenburg Thalmann's officers and board of directors. Other than the
warrants, Ladenburg Thalmann does not currently own any of our securities as of
the date of this prospectus. Assuming that Ladenburg Thalmann sells all shares
it acquires upon exercise of the warrant, it will no longer hold any of our
common stock.
PLAN OF DISTRIBUTION
General
Wishmasters is offering the common stock for its account as statutory
underwriter within the meaning of Section 2(a)(ii)(1) of the Securities Act of
1933, as amended, and not for our account. We will not receive any proceeds from
the sale of common stock by Wishmasters. Wishmasters may be offering for sale up
to 6,100,000 shares of common stock acquired by it either upon exercise of the
warrant for common stock or pursuant to the terms of the stock purchase
agreement more fully described under the section above entitled "The Common
Stock Purchase Agreement." Wishmasters has agreed to be named as a statutory
underwriter within the meaning of the Securities Act of 1933 in connection with
such sales of common stock and will be acting as an underwriter in its resales
of the common stock under this prospectus. Wishmasters has, prior to any sales,
agreed not to effect any offers or sales of the common stock in any manner other
than as specified in the prospectus and not to purchase or induce others to
purchase common stock in violation of Regulation M under the Exchange Act.
<PAGE>
20
The common stock may be sold from time to time by Wishmasters, Ladenburg
Thalmann or by pledgees, donees, transferees or other successors in interest.
Such sales may be made on the American Stock Exchange, on the over-the-counter
market or otherwise at prices and at terms then prevailing or at prices related
to the then current market price, or in negotiated private transactions, or in a
combination of these methods. Wishmasters is, and Ladenburg Thalmann may be
deemed to be, an underwriter in connection with such sales.
The common stock may be sold in one or more of the following manners:
a block trade in which the broker or dealer so engaged will attempt to
sell the shares as agent, but may position and resell a portion of the
block as principal to facilitate the transaction;
purchases by a broker or dealer for its account under
this prospectus; or
ordinary brokerage transactions and transactions in
which the broker solicits purchases.
In effecting sales, brokers or dealers engaged by the selling security
holders may arrange for other brokers or dealers to participate. Except as
disclosed in a supplement to this prospectus, no broker-dealer will be paid more
than a customary brokerage commission in connection with any sale of the common
stock by the selling security holders. Brokers or dealers may receive
commissions, discounts or other concessions from the selling security holders in
amounts to be negotiated immediately prior to the sale. The compensation to a
particular broker-dealer may be in excess of customary commissions. Profits on
any resale of the common stock as a principal by such broker-dealers and any
commissions received by such broker-dealers may be deemed to be underwriting
discounts and commissions under the Securities Act of 1933. Any broker-dealer
participating in such transactions as agent may receive commissions from the
selling security holders (and, if they act as agent for the purchaser of such
common stock, from such purchaser). Broker-dealers may agree with the selling
security holders to sell a specified number of shares of common stock at a
stipulated price per share, and, to the extent such a broker dealer is unable to
do so acting as agent for the selling security holders, to purchase as principal
any unsold common stock at price required to fulfill the broker-dealer
commitment to the selling security holders. Broker-dealers who acquire common
stock as principal may thereafter resell such common stock from time to time in
transactions (which may involve crosses and block transactions and which may
involve sales to and through other broker-dealers, including transactions of the
nature described above) in the over-the-counter market, in negotiated
transactions or otherwise at market prices prevailing at the time of sale or at
negotiated prices, and in connection with such resales may pay to or receive
from the purchasers of such common stock commissions computed as described
above. Such brokers or dealers and any other participating brokers or dealers
may be deemed to be underwriters in connection with such sales.
In addition, any shares of common stock covered by this prospectus which
qualify for sale pursuant to Rule 144 may be sold under Rule 144 rather than
pursuant to this prospectus.
We will not receive any of the proceeds from the sale of these shares of
common stock, although we have paid the expenses of preparing this prospectus
and the related registration statement of which it is a part, and have
reimbursed Wishmasters $35,000 for its legal, administrative and escrow costs.
The selling security holders are subject to the applicable provisions of
the Exchange Act, including without limitation, Rules 10b-5 and Regulation M
thereunder. Under applicable rules and regulations under the Exchange Act, any
person engaged in a distribution of the common stock may not simultaneously
engage in market making activities with respect to such securities for a period
beginning when such person becomes a distribution participant and ending upon
such person's completion of participation in a distribution, including
stabilization activities in the common stock to effect covering transactions, to
impose penalty bids or to effect passive market making bids.
In addition, in connection with the transactions in the common stock, we
and the selling security holders will be subject to applicable provisions of the
Exchange Act and the rules and regulations under that Act, including, without
limitation, the Rules set forth above, and in so far as we and the selling
security holders are distribution participants, Regulation M. These restrictions
may affect the marketability of the common stock. The selling security holders
will pay all commissions and certain other expenses associated with the sale of
the common stock.
<PAGE>
21
We will use our best efforts to file, during any period in which offers or
sales are being made, one or more post effective amendments to the registration
statement of which this prospectus is a part to describe any material
information with respect to the plan of distribution not previously disclosed in
this prospectus or any material change to such information in this prospectus.
This obligation may include, to the extent required under the Securities Act of
1933, that a supplemental prospectus be filed, disclosing
the name of any such broker-dealers;
the number of shares of common stock involved;
the price at which the shares of common stock are to be
sold;
the commissions paid or discounts or concessions
allowed to such broker-dealers, where applicable;
that such broker-dealers did not conduct any
investigation to verify the information set out or
incorporated by reference in this prospectus, as
supplemented; and
any other facts material to the transaction.
The price at which we will issue the common stock to Wishmasters under the
stock purchase agreement will be 93% of current market price, measured as the
average daily price of the common stock as traded on the American Stock
Exchange, for each day in the pricing period with respect to each draw down
request, all as further defined in the stock purchase agreement. Assuming an
average daily price of $3.00 (based on recent daily prices of the common stock
as traded on the American Stock Exchange in May, 2000), assuming we use the
entire $15 million of financing available under the stock purchase agreement,
and assuming that we do not issue any more than the shares registered under the
registration statement of which this prospectus is a part, underwriting
compensation for Wishmasters based on the discounted purchase price will be
$1,129,032, or $.21 per share.
Limited Grant of Registration Rights
We granted the registration rights to Wishmasters described under the
section entitled "The Common Stock Purchase Agreement".
In connection with any such registration, we will have no obligation:
to assist or cooperate with Wishmasters in the offering
or disposition of such shares;
to indemnify or hold harmless the holders of any such
shares (other than Wishmasters) or any underwriter
designated by such holders;
to obtain a commitment from an underwriter relative to
the sale of any such shares; or
to include such shares within an underwritten offering
of our shares of common stock.
We will assume no obligation or responsibility whatsoever to determine a
method of disposition for such shares or to otherwise include such shares within
the confines of any registered offering other than the registration statement of
which this prospectus is a part.
We will use our best efforts to file, during any period during which we are
required to do so under our registration rights agreement with Wishmasters, one
or more post-effective amendments to the registration statement of which this
prospectus is a part to describe any material information with respect to the
plan of distribution not previously disclosed in this prospectus or any material
change to such information in this prospectus. See the section above entitled
"The Common Stock Purchase Agreement."
LEGAL MATTERS
The validity of the issuance of the shares being offered
hereby will be passed upon for us by Akerman, Senterfitt &
Eidson, P.A., Ft. Lauderdale, Florida 33301.
EXPERTS
Our annual consolidated financial statements incorporated by reference in
this Prospectus have been audited by BDO Seidman, LLP, independent certified
public accountants, to the extent and for the periods set forth in their report
incorporated herein by reference, and are incorporated herein in reliance upon
such report given upon the authority of said firm as experts in auditing and
accounting.
<PAGE>
22
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
SEC registration fee $ 4,564.98
Amex listing fee 17,500.00
Legal fees and expenses 10,000.00
Accountants' fees 5,000.00
Miscellaneous 3,000.00
Total $40,064.98
Item 15. Indemnification of Directors and Officers.
The Company, a Delaware corporation, has included in its Restated
Certificate of Incorporation and Restated Bylaws provisions to (i) eliminate the
personal liability of its directors for monetary damages resulting from breaches
of their fiduciary duty, provided that such provision does not eliminate
liability for breaches of the duty of loyalty, acts or omissions not in good
faith or which involves intentional misconduct or a knowing violation of law,
violations under Section 174 of the Delaware General Corporation Law or for any
transaction from which the director derived an improper personal benefit and
(ii) indemnify its directors and officers to the fullest extent permitted by the
Delaware corporation law. The Company believes that these provisions are
necessary to attract and retain qualified persons as directors and officers.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended, may be permitted to directors, officers or persons
controlling the Company, the Company has been informed that in the opinion of
the Commission such indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable.
Item 16. Exhibits.
The exhibits filed as part of this Registration Statement are as follows:
Exhibit
Number Description
3.1 Restated Certificate of Incorporation of the Registrant, as amended
(2)
3.2 Restated Bylaws of the Registrant (3)
4.1 Stock Purchase Warrant to purchase common stock issued to Wishmasters
dated May 9, 2000(1)
4.2 Stock Purchase Warrant to purchase common stock issued to Ladenburg
Thalmann dated May 9, 2000(1)
5.1 Opinion of Akerman, Senterfitt & Eidson, P.A. (1)
10.1 Common Stock Purchase Agreement between nStor and Wishmasters dated
May 4, 2000(1)
10.2 Registration Rights Agreement between nStor and Wishmasters dated May
4, 2000(1)
10.3 Escrow Agreement among nStor, Wishmasters and Epstein, Becker & Green,
P.C. dated May 4, 2000(1)
23.1 Consent of BDO Seidman, LLP (1)
23.2 Consent of Akerman, Senterfitt & Eidson, P.A. (included in opinion
filed as Exhibit 5.1)
24.1 Power of Attorney (included on signature page to this Registration
Statement)
------------
(1) Filed herewith.
(2) Incorporated by reference to the Registrant's Form S- 3, File No.
333-94935, filed on January 13, 2000.
(3) Incorporated by reference to the Registrant's Form 10- K for the
fiscal year ended October 31, 1996.
<PAGE>
23
Item 17. Undertakings
(a) The undersigned Registrant hereby undertakes:
1. To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i)to include any prospectus required by Section
10(a)(3) of the Securities Act of 1933, as
amended;
(ii)to reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most
recent post- effective amendment thereof), which, individually or
in the aggregate, represent a fundamental change in the
information set forth in the Registration Statement; and
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in the Registration
Statement or any material change to such information in the
Registration Statement.
Provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) of this
section do not apply if the information required to be included in a
post- effective amendment by those paragraphs is contained in
periodic reports filed with or furnished to the Commission by the
Registrant pursuant to Section 13 or Section 15(d) of the Securities
Exchange Act of 1934, as amended, that are incorporated by reference
in the Registration Statement.
2. That, for the purpose of determining any liability under the
Securities Act of 1933, as amended, each such post-effective
amendment shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.
3. To remove from registration by means of a post- effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
4. The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, as
amended, each filing of the Registrant's Annual Report pursuant to
Section 13(a) or Section 15(d) of the Securities Exchange Act of
1934, as amended, that is incorporated by reference in the
Registration Statement shall be deemed to be a new registration
statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
5. Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended (the "Act"), may be permitted to
directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question
whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication
of such issue.
<PAGE>
24
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant,
nStor Technologies, Inc., certifies that it has reasonable grounds to believe
that it meets all of the requirements for filing on Form S-3 and has duly caused
this Registration Statement on Form S-3 to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of West Palm Beach, State of
Florida, on the 7th day of June, 2000.
nSTOR TECHNOLOGIES, INC.
By: /s/ Jack Jaiven
-----------------------------
Jack Jaiven, Vice President
and Treasurer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints H. Irwin Levy and Jack Jaiven and each of them,
his true and lawful attorney-in- fact and agents, with full power of
substitution and resubstitution for him and in his name, place and stead, in any
and all capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that each said attorneys-in-fact or his substitute or
substitutes, may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in their
capacities set forth below.
Signature Title Date
/s/ H. Irwin Levy Chairman of the June 7, 2000
H. Irwin Levy Board of Directors
/s/ Larry Hemmerich President, Chief June 7, 2000
Larry Hemmerich Executive Officer
(Principal Executive
Officer) and Director
/s/ Jack Jaiven Vice President and June 7, 2000
Jack Jaiven Treasurer
(Principal Financial
and Accounting Officer)
Roger H. Felberbaum Director June 7, 2000
/s/ Michael L. Wise Director June 7, 2000
Michael L. Wise
/s/ Bernard R. Green Director June 7, 2000
Bernard R. Green
<PAGE>
25
EXHIBIT INDEX
Exhibit
Number Description
4.1 Stock Purchase Warrant to purchase common stock issued to Wishmasters
dated May 9, 2000
4.2 Stock Purchase Warrant to purchase common stock issued to Ladenburg
Thalmann dated May 9, 2000
5.1 Opinion of Akerman, Senterfitt & Eidson, P.A.
10.1 Common Stock Purchase Agreement between nStor and Wishmasters dated
May 4, 2000
10.2 Registration Rights Agreement between nStor and Wishmasters dated May
4, 2000
10.3 Escrow Agreement among nStor, Wishmasters and Epstein, Becker & Green,
P.C. dated May 4, 2000
23.1 Consent of BDO Seidman, LLP
