U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A
(Mark One)
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31,1996
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[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (D) OF THE
EXCHANGE ACT
For the transition period from ____________ to ____________
Commission file number 1-13616
STORAGE COMPUTER CORPORATION
----------------------------
(Exact name of small business issuer as specified in its charter)
Delaware 02-0450593
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
11 Riverside Street Nashua, NH 03062-1373
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(Address of principal executive offices)
(603) 880-3005
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(Issuer's telephone number)
N/A
------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes [ X ] No
[ ]
The number of shares of Common Stock outstanding as of the close of business
on May 10, 1996 was 10,644,098 shares.
Transitional Small Business Disclosure Format (Check One)
Yes [ ] No [ X ]
1
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited) Page(s)
-------
Condensed Consolidated Balance Sheets -- March 31, 1996
and December 31, 1995 ............................................ 3
Condensed Consolidated Statements of Operations -- Three months
ended March 31, 1996 and 1995..................................... 4
Condensed Consolidated Statements of Cash Flows -- Three months
ended March 31, 1996 and 1995..................................... 5
Notes to Condensed Consolidated Financial Statements --
March 31, 1996.................................................... 7
Item 2. Management's Discussion and Analysis or Plan of Operation.......... 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................. 12
Item 6. Exhibits and Reports on Form 8-K.................................. 12
2
PART I. FINANCIAL INFORMATION
STORAGE COMPUTER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, 1996 December 31, 1995
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $1,601,644 $ 871,101
Accounts receivable (net) 5,733,778 7,212,091
Lease contracts receivable 60,000
Inventories 5,058,621 4,580,066
Prepaid expenses and other current assets 123,982 106,751
Tax refund receivable 34,003
Deferred tax asset (Note C) 495,983 529,997
---------------------- --------------------
Total current assets 13,074,008 13,334,009
---------------------- --------------------
Lease contract receivable,
less current portion 159,773
---------------------- --------------------
Deferred tax asset 588,000 588,000
---------------------- --------------------
Property and equipment, less
allowance for depreciation 864,979 790,605
---------------------- --------------------
Investment in affiliates 55,000 55,000
---------------------- --------------------
$14,741,760 $14,767,614
====================== ====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Note payable $ 925,119 $ 399,973
Current portion of long-term debt
and lease obligation 39,667 39,677
Accounts payable 1,765,889 2,350,730
Accrued expenses 1,389,147 990,171
Accrued income taxes 17,114 931,016
Deferred stockholder compensation 299,500 299,500
---------------------- --------------------
Total current liabilities 4,436,436 5,011,067
---------------------- --------------------
Long-term debt and lease obligations,
less current portion 55,597 61,594
Long-term debt, related party 910,000 910,000
---------------------- --------------------
Total liabilities 965,597 971,594
---------------------- --------------------
Stockholders' equity
Common stock 10,664 10,636
Additional paid in capital 12,238,235 12,223,860
Retained earnings (deficit) (2,909,172) (3,449,543)
---------------------- --------------------
9,339,727 8,784,953
---------------------- --------------------
$14,741,760 $14,767,614
====================== ====================
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
3
STORAGE COMPUTER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
MARCH 31, 1996 March 31, 1995
<S> <C> <C>
Net sales $6,035,258 $4,432,261
Cost of goods sold 3,130,742 2,037,440
--------------------- ---------------------
Gross profit 2,904,516 2,394,821
--------------------- ---------------------
Operating expenses:
Selling and marketing 1,304,191 1,087,089
General and administrative 285,746 417,478
Research and development 480,344 470,770
Royalty expense 107,536
--------------------- ---------------------
2,070,281 2,082,873
--------------------- ---------------------
Operating income 834,235 311,948
--------------------- ---------------------
Other income (expense):
Foreign currency transaction gain (loss) (47,976) 85,587
Interest income 6,452 41,465
Interest expense (56,762) (113,412)
Other income (expense) 17,524 81,569
--------------------- ---------------------
(80,762) 95,209
--------------------- ---------------------
Equity in net income (loss) of
affiliates 0 (19,549)
--------------------- ---------------------
Income before income taxes 753,473 387,608
--------------------- ---------------------
Provision for federal and state
income taxes
Current tax expense 179,088 252,712
Deferred tax (benefit) expense 34,014 (708,237)
--------------------- ---------------------
213,102 (455,525)
--------------------- ---------------------
Net income $540,371 $ 843,133
===================== =====================
Net income per share $0.05 $0.07
Weighted average shares outstanding 11,886,529 11,952,287
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
4
STORAGE COMPUTER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
MARCH 31, 1996 March 31, 1995
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $540,371 $843,133
Adjustments to reconcile net income
to net cash used for operating
activities:
Depreciation and amortization 59,260 63,432
Deferred tax (benefit) 34,014 (708,237)
Equity in net (income) loss of affiliates 19,549
(Gain) or loss on foreign currency
translation adjustment 47,976 (85,587)
Changes in operating assets and liabilities:
Accounts receivable (net) 1,478,313 (517,889)
Lease contracts receivable (219,773)
Inventories (478,555) (606,062)
Other current assets 16,772 (225,601)
Accounts payable and accrued expenses (1,099,776) (373,834)
--------------------- ----------------------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 378,602 (1,591,096)
--------------------- ----------------------
CASH FLOWS FROM INVESTING ACTIVITIES,
Purchases of property & equipment net (174,536) (17,230)
--------------------- ----------------------
CASH FLOW FROM FINANCING ACTIVITIES:
Net proceeds from credit line 525,146
Repayment of long-term debt and capital debt
lease obligations (5,997) (10,695)
Issuance of common stock 14,403
--------------------- ----------------------
NET CASH FLOWS PROVIDED BY (USED IN)
FINANCING ACTIVITIES 533,552 (10,695)
--------------------- ----------------------
Effect of exchange rate changes on cash (7,075) (16,130)
--------------------- ----------------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 730,543 (1,635,151)
Cash and cash equivalents at beginning of period 871,101 3,288,106
--------------------- ----------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $1,601,644 $1,652,955
===================== ======================
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
5
STORAGE COMPUTER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
MARCH 31, 1996 March 31, 1995
<S> <C> <C>
Supplemental disclosures of cash flow information
Cash payments for:
Interest $42,457
========================== ======================
Taxes $1,024,586 $1,035,000
========================== ======================
Supplemental schedule of noncash financing activities:
Debt converted to common stock
Increase in common stock $ 135
Increase in additional paid in capital 624,865
----------------------
Decrease in debt $625,000
======================
</TABLE>
See Notes to Condensed Consolidated Financial Statements
6
STORAGE COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
NOTE A - THE COMPANY AND BASIS OF PRESENTATION
Storage Computer Corporation (the "Company") and its subsidiaries are engaged in
the development, manufacture and sale of computer disk arrays and computer
equipment worldwide. The consolidated financial statements include the accounts
of the Company and its wholly-owned subsidiaries, Storage Computer Europe GmbH,
Vermont Research Products, Inc. and Storage Computer UK Ltd.. All significant
intercompany accounts and transactions have been eliminated in consolidation.
The Company also has an investment in Storage Computer (Asia) Ltd. AND Storage
Computer France, SA, 20%-owned affiliates, which is accounted for by the equity
method.
On March 6, 1995, Vermont Research Products, Inc., a wholly-owned subsidiary of
the Company, acquired the entire business and substantially all of the property
and assets of Vermont Research Corporation ("VRC") in exchange for shares of
Common Stock (the "Reorganization"). The Reorganization was accounted for as a
pooling of interests. Accordingly, the oprational results of Vermont Research
Products, Inc. are included in the accompanying financial statements for all
periods presented as if the Reorganization had been consummated at the beginning
of the earliest period presented. In connection with the Reorganization, the
Company registered certain shares with the Securities and Exchange Commission to
exchange with the former shareholders of Vermont Research Corporation whereby
the Company became an SEC reporting company for the first time.
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Item 310 of
Regulation S-B. Accordingly, they do not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements and should be read in conjunction with the financial
statements and related notes included in the Annual Financial Report on Form
10-KSB filed by the Company with the Securities and Exchange Commission,
containing the Company's financial statements for the fiscal year ended December
31, 1995. In the opinion of management, the accompanying financial statements
reflect all adjustments, all of which are of a normal, recurring nature, to
fairly present the Company's consolidated financial position, results of
operations and cash flows. The results of operations for the three months ended
March 31, 1996 are not necessarily indicative of the results to be expected for
the full year.
NOTE B - CONVERSION OF DEBENTURES
In March 1995, Vermont Research Products, Inc. assumed certain debentures and
common stock purchase warrants issued by Vermont Research Corporation in 1993.
On March 7, 1995 the debenture holders converted all of the debentures
($625,000) and related warrants into 135,000 shares of the Company's Common
Stock.
NOTE C - DEFERRED TAX ASSET
Subsequent to the Reorganization discussed above, the Company determined that
the benefit of the net operating loss of a wholly-owned foreign subsidiary of
Vermont Research Products, Inc. was more likely than not to be realized and,
accordingly, a previously established valuation reserve against the asset was
reduced. Net income for the three months ended March 31, 1995 was impacted by a
$685,000 reduction of the valuation reserve.
7
STORAGE COMPUTER CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Pursuant to the Agreement and Plan of Reorganization dated October 24, 1994, as
amended by a First Amendment to Agreement and Plan of Reorganization dated
January 31, 1995, the Company and VRC completed the Reorganization effective
March 6, 1995. The following analysis of financial condition and results of
operations discusses and analyzes on a combined basis the results of operations
for the three month periods ended March 31,1996 and 1995. The financial
information reported as a consolidated group reflects the historical financial
information on a combined basis. The combined financial reporting should be
analyzed, in the opinion of management, in the context that prior to March 6,
1995 SCC and VRC functioned as independent entities and had (i) limited or no
coordination of business efforts, (ii) redundant expenses, and (iii) independent
management decision processes.
CAUTIONARY STATEMENTS
The Private Securities Litigation Reform Act of 1995 contains certain safe
harbors regarding forward-looking statements. From time to time, information
provided by the Company or statements made by its directors, officers, or
employees may contain "forward-looking" information which involve risk and
uncertainties. Any statements in this report that are not statements of
historical fact are forward-looking statements (including, but not limited to,
statements concerning the characteristics and growth of the Company's market and
customers, the Company's objectives and plans for future operations, possible
acquisitions, and the Company's expected liquidity and capital resources). Such
forward-looking statements are based on a number of assumptions and involve a
number of risks and uncertainties, and, accordingly, actual results could differ
materially. Factors that may cause such differences include, but are not limited
to: the continued and future acceptance of the Company's products and services,
the rate of growth in the industries of the Company's customers; the presence of
competitors with greater technical marketing and financial resources; the
Company's ability to promptly and effectively respond to technological change
which meet evolving customer needs; capacity and supply constraints or
difficulties; and the Company's ability to successfully integrate new
operations. For a further discussion of these and other risks and uncertainties,
reference is hereby made to Exhibit 99 filed with this report.
NET SALES
Net sales for the three month period ended March 31, 1996 of $6,035,258
reflected an increase in combined product sales of $1,602,997 or 36%, compared
with the quarter ended March 31,1995. The increase in sales is primarily
attributed to the RAID 7 product line.
The increased sales are attributed strictly to an increase in sales activity as
the Company continues its US and international marketing and sales efforts. The
Company did not initiate any price changes during the period, except for price
adjustments relating to component parts such as disk drives.
Except for sales which occur through the Central European sales office located
in Germany and the Western European sales office located in the United Kingdom,
which sales are conducted in the functional currencies of those operations, all
sales are made or denominated in US dollars to limit the amount of foreign
currency risk. At the present time the Company is analyzing the cost benefit of
hedging activities and derivative products to offset currency risk, which, in
connection with sales transactions, is currently considered minimal by
management. For a further discussion of the impact of foreign currency risks see
the analysis and discussion of Foreign Currency Transaction Gain (Loss) below.
COST OF GOODS SOLD
Cost of goods sold for the three month periods ended March 31, 1996 and 1995
were $3,130,742 and $2,037,440, respectively, or 52% and 46% of net sales. The
increase in the cost of goods sold as a percentage of net sales is attributed
primarily to two factors. In the first quarter of 1996, the Company experienced
a shift in sales which reflected an increased demand for larger systems which
have lower profit margins. The lower profit margins are caused by a greater
percentage of system costs being associated with components manufactured by
third parties, for example disk drives, which have lower profit margins than the
Company-manufactured components contained in the Company's products. The Company
believes that this shift resulted from the increased storage capacities of
standard disk drive solutions which make the Company's lower-end products appear
more expensive when measured against competitors' lower performing products on a
price per gigabyte basis. The Company believes that customer demand for higher
performance data storage solutions and the trend toward a greater percentage of
larger systems sales of its products will continue. The Company is continuously
seeking to develop products and product upgrades to accomodate the larger
systems segment of the data storage market, where the Company believes it can
sell its products emphasizing greater performance, including faster data
transfer rates combined with required functionality, and should be able to
maintain or increase gross profit margins associated with larger systems sales.
Additionally, management has focused on developing its distributor network which
has generated sales in the first quarter that have a lower gross profit margin
than direct sales to end users.
8
SELLING AND MARKETING EXPENSES
Selling expenses for the three month periods ended March 31,1996 and 1995 were
$1,304,191 and $1,087,089, respectively or 22% and 25% of net sales. The dollar
increase in selling expenses between the three month periods ended March 31,
1996 and 1995 of approximately $217,000 was primarily caused by increased
expansion of sales and marketing efforts, opening new sales offices and
increased sales personnel.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the three month periods ended March 31,
1996 and 1995 were $285,746 and $417,478, respectively or 5% and 9% of net
sales.. The absolute dollar decrease in general and administrative expenses
between the three month periods ended March 31, 1996 and 1995 of approximately
$132,000 resulted primarily from the reduction of redundant personnel, the
reduction of professional fees and normal overhead items.
RESEARCH AND DEVELOPMENT
Research and development expenses for the three month periods ended March 31,
1996 and 1995 were $480,344 and $470,770, respectively or 8% and 11% of net
sales. The dollar increase in expenditures between the three month periods ended
March 31, 1996 and 1995 of approximately $10,000 resulted primarily from
increased personnel costs and outside consulting and engineering fees.
ROYALTY EXPENSE
Royalty expense for the three month periods ended March 31, 1996 and 1995 was $0
and $ 107,536, respectively or 0% and 2.4% of net sales. The decrease in royalty
expense of $107,536 was caused by the termination of a royalty agreement by
mutual consent as of December 31, 1995.
FOREIGN CURRENCY TRANSACTION GAIN (LOSS)
The foreign currency transaction gain (loss) for the three month periods ended
March 31, 1996 and 1995 were $(47,976) and $85,587, respectively, or (.8)% and
2.0% of net sales. The foreign currency transaction (loss)/gain for the three
month periods ended March 31, 1996 and 1995 was due primarily to the
increase/decrease in value of the dollar to the German mark.
The Company's foreign subsidiaries' obligations to their parent company are
denominated in US Dollars. There is a potential for a foreign currency gain or
loss based upon fluctuations between the US Dollar and the subsidiaries'
functional currencies. This exposure is limited to the period between the time
of accrual of such liability to the parent in the subsidiaries' local currency
and the time of its payment in US Dollars. Other than the intercompany balances
noted above, the Company does not believe it has any material unhedged monetary
assets, liabilities or commitments which are denominated in a currency other
than the operations' functional currency. The Company expects such exposure to
continue until its foreign subsidiaries reach a mature level of operations.
9
INTEREST INCOME
Interest income for the three month periods ended March 31, 1996 and 1995 was
$6,452 and $41,465, respectively, or .1% and .9% of net sales. Interest income
declined in absolute dollars between the three month periods ended March 31,
1996 and 1995 by approximately $35,000 due to a decrease in the availability of
cash, caused primarily by increases in accounts receivable and inventory.
INTEREST EXPENSE
Interest expense for the three month periods ended March 31, 1996 and 1995 was
$56,762 and $113,412, respectively, or .9% and 2.5% of net sales. The decline of
approximately $57,000 in interest expense for the three month period ended March
31, 1996 and 1995 is the result of the conversion of $625,000 of VRP notes with
corresponding warrants in March of 1995 resulting in the recognition of $70,000
of original issue discount. The decrease was offset by an increase in the cost
of borrowing funds on the Company's unsecured credit line.
OTHER INCOME (LOSS)
The changes in the three month periods ended March 31, 1996 of $17,524 and
$81,569 is primarily the net result of the receipt of funds relating to the
terminated VRC liabilities
EQUITY IN NET INCOME (LOSS) OF AFFILIATES
For the three month periods ended March 31, 1996 and 1995 the Company' income
from affiliates was $0 and $(19,549) respectively.
PROVISION FOR FEDERAL AND STATE INCOME TAXES
The current tax expense provision for the three month periods ended March 31,
1996 and 1995 was $179,088 and $252,712, respectively, resulting in effective
tax rates of approximately 24% and 65% .
The 41 percentage point decrease in the effective tax rate between the three
month periods ended March 31, 1996 and 1995 was primarily caused by the foreign
operations operating on either a break even or profitable basis in the quarter
ended March 31, 1996 compared to operating losses in the quarter ended March 31,
1995.
The decrease/(increase) in the deferred tax benefit for the three month periods
ended March 31, 1996 and 1995 of $34,014 and $(708,237), respectively primarily
relates to the utilization of domestic net operating losses during the first
quarter of 1996 and the recognition of foreign tax net operating loss
carryforwards of Storage Computer UK Ltd., formerly Vermont Research Limited, a
wholly owned subsidiary of Vermont Research Products, Inc., during the first
quarter of 1995. The valuation reserve related to the deferred tax asset was
reduced during the first quarter of 1995 since, in management's opinion, it is
more likely than not that the loss carryforwards will be utilized through the
generation of profits at the subsidiary level. Pursuant to UK tax law there is
no statutory carryforward time limitation relating to the tax net operating
losses. The utilization of the losses is dependent upon the wholly owned
subsidiary achieving profit in the same line of business which generated the
losses, and in which it continues to operate.
10
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW
The cash flow deficits generated in past periods by the operating activities are
primarily a function of the rapid growth of the Company and relate to the growth
in accounts receivable and inventory. It is anticipated that should the
Company's growth and expansion rate continue at its current trend, operating
cash flow deficits may occur in the future as a result of such expansion.
However, during the quarter ended March 31, 1996 the Company was able to
generate a positive cash flow from operations through inventory and account
receivable management. The results of operations for the first three months of
1996, as it relates to cash flow, are not necessarily indicative of the results
to be expected for the full year. Management believes that its growth can be
financed through additional borrowing arrangements as needed.
DEBT AND EQUITY
On August 4, 1995 the Board of Directors approved, and the Company entered into
a $6,000,000 unsecured, demand line of credit with a bank. This is to be used
for the working capital needs of the Company. The loan bears interest at the
bank's prime rate or under certain conditions, at the bank's LIBOR Rate plus 200
basis points. The loan review date is May 31, 1996. The Company is currently
negotiating the renewal and expansion of the credit facility. During the quarter
ended March 31, 1996 the Company had additional net borrowings on the credit
line of approximately $525,000 which resulted in a total outstanding liability
on March 31, 1996 of approximately $925,000. Management believes the credit
facility will accommodate all of its short term working capital requirements.
As of March 31, 1996, the only other material long term debt is a note with the
founder and majority stockholder for $910,000 with interest at prime plus 1%,
which is due in January 1998.
ACCOUNTS RECEIVABLE
The decrease in accounts receivable from December 31, 1995 to March 31, 1996 of
approximately $1,500,000 or 21% is primarily due to the collection of accounts
receivable resulting from the record sales occurring in the quarter ended
December 31, 1995 of approximately $7,900,000. The Company did not change its
credit terms during the period and there has been no material deterioration in
the aging of accounts receivable during the period.
INVENTORY
Inventory increased approximately $478,000 or 10% from the December 31, 1995 to
March 31, 1996. The investment in inventory is impacted by several factors,
including, but not limited to, the timing of purchasing component parts such as
disk drives; the non recognition of revenue and corresponding inventory
increases due to inventory transfers deemed to be evaluation units; the timing
of inventory reductions due to intercompany transfers and increased inventory
locations throughout the United States and Europe.
CAPITAL EXPENDITURES
The Company does not have any material commitments for capital expenditures at
this time.
11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
99 Cautionary Statements
(b) No reports on form 8-K were filed during the quarter for which this
report is filed.
12
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
STORAGE COMPUTER CORPORATION
----------------------------
Registrant
Date: August 1, 1996 /s/ Theodore J. Goodlander
------------------------ ----------------------------
Theodore J. Goodlander
President, Chief Executive Officer and
Chairman of the Board of Directors
(Principal Executive Officer and
Principal Financial and Accounting Officer)
13
EXHIBIT 99
"SAFE HARBOR" STATEMENT UNDER PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995
Forward-looking statements made by or on behalf of the Company represent
the Company's reasonable judgement on the future and are subject to risks and
uncertainties. Actual results may differ materially from those projected in the
forward-looking statements. Such risks and uncertainties include, among others:
Limited Operating History of SCC. SCC sold its first RAID 7 system in April
1992. While the Company has achieved significant sales growth, it is still in
the expansion stage of its marketing efforts. The Company believes that in order
to sustain its marketing efforts and achieve sales which would enable it to be
profitable in the long term and to compete effectively in its chosen
marketplace, it will have to intensify its sales and marketing efforts in the
near term, which will involve significant expense and the usual strains on
management caused by rapid expansion. Given the Company's limited operating
history, it is not possible to predict whether the Company will be able to
continue to fund and manage the necessary expansion of its marketing and sales
efforts in order to achieve long-term growth and profitability. The likelihood
of the Company's success must be considered in light of the problems, expenses,
difficulties and delays frequently encountered in connection with the rapid
expansion of a high-technology business. These include, but are not limited to,
competition, the need to expand customer support capabilities and marketing
expertise, and setbacks in product development and market acceptance.
Limited Product History. The hardware and software components of certain of
the Company's newer storage subsystem products have performed to their
specifications in simulations under test conditions and at customer sites.
However, because of the limited period of their use and the limited
configurations in which they have been tested at customer sites, there can be no
assurance that they will perform to specifications under all conditions or for
all applications. If such components fail to meet such specifications, the
Company may be required either to enhance or improve one or more hardware or
software components of the storage system, which could lead to a delay in market
acceptance of its products or to perform warranty and/or service obligations
which could adversely affect profits. Any significant hardware or software
reliability problems would have a material adverse effect on the Company's
business and prospects.
Limited Market Acceptance. SCC's RAID and Stealth Cache products are based
on designs which have not yet received widespread acceptance in the market for
commercially available storage systems. Prospective customers may require a
longer evaluation period for these products than for storage systems marketed by
more established companies. SCC's
sales and marketing strategy contemplates sales of its storage systems for both
technical and commercial applications. There can be no assurance that the
Company will be able to penetrate either storage market, to any significant
extent, or in the time frames sufficient to assure its success. The failure of
the Company to penetrate these storage markets on a timely basis would have a
materially adverse impact upon its operations and prospects. Large computer
users may be slow to adopt new products for use in their core applications,
particularly systems that entail significant capital investment. In addition,
the Company's products could be subject to export controls imposed by the United
States Government, which could create delays in the widespread introduction of
the Company's systems in international markets. Any significant delay in market
acceptance of the Company's products could result in the marketing of the
Company's products at a time when their cost and performance characteristics are
not competitive.
Foreign Sales. Approximately, 57%, 53% and 61% of SCC's revenues during its
fiscal years ended December 31, 1993, 1994 and 1995, respectively, were derived
from sales made outside of the United States. SCC's profitability and financial
condition are materially dependent on the success of its foreign sales efforts.
In general, SCC's foreign sales are subject to certain inherent risks, including
unexpected changes in regulatory and other legal requirements, tariffs and other
trade barriers, longer accounts receivable payment cycles and the possibility of
increased difficulty in collection of accounts receivable, difficulty in the
management of foreign operations, potentially adverse tax consequences including
restrictions on the repatriation of earnings, and the burdens of compliance with
a wide variety of foreign laws. Currency transaction gains or losses on
conversion to United States dollars from foreign sales denominated in foreign
currencies may also contribute to fluctuations in SCC's results of operations.
There can be no assurance that these factors will not have an adverse impact on
SCC's future foreign sales and, consequently, on SCC's operating results. SCC
does not presently engage in the hedging of foreign currencies or similar
activities.
Dependency on Developing New Products and Technological Change. The market
for storage products is characterized by rapidly changing technology, product
obsolescence and evolving industry standards. The continued success of the
Company will depend upon its ability to enhance existing products and to
introduce new products and features in a timely manner to meet changing customer
requirements. There can be no assurance that the Company will be successful in
identifying, developing, manufacturing and marketing new products, or in
enhancing its existing products. The Company's business will be adversely
affected if it incurs delays in developing new products or enhancements, or if
such products or enhancements do not gain market acceptance. In addition, there
can be no assurance that products or technologies developed by others will not
render the Company's products or technologies noncompetitive or obsolete.
Competition and Pricing. The information storage market is extremely
competitive. Companies such as UNISYS, Data General Corporation, Digital
Equipment Corporation, EMC Corporation, IBM Corporation, IPL, Hewlett-Packard,
Micro Technology, NCR Corporation, Storage Technology, Sun Microsystems, and
more than 100 other public and private companies provide disk arrays for a wide
variety of computer systems, workstations and PCs. Although SCC is currently
unaware of any other vendor offering an asynchronous
transfer RAID 7 disk array, many of the Company's competitors benefits from
greater market recognition and have greater financial, research and development,
production and marketing resources than the Company. There can be no assurance
that the Company will be able to compete successfully against existing companies
or future entrants to the marketplace. Furthermore, reductions in the price of
competitive products, changes in discount levels or announcements by the
Company's competitors of new generations of high-performance systems may
adversely affect sales of the Company's products.
Licenses, Patents and Trademarks. The Company will rely on copyright,
patent, trade secret and trademark law, as well as provisions in its license,
distribution and other agreements, in order to protect its intellectual property
rights. SCC holds numerous patents protecting aspects of its proprietary
technology and also has numerous patents pending in foreign countries. No
assurance can be given that any patents previously, or hereafter issued will
provide protection for the Company's competitive position. Although the Company
intends to protect its patent rights vigorously, there can be no assurance that
these measures will be successful. Additionally, no assurance can be given that
the claims on any patents held by the Company will be sufficiently broad to
protect the Company's technology. In addition, no assurance can be given that
the patents previously or hereafter issued to the Company will not be
challenged, invalidated or circumvented or that the rights granted thereunder
will provide competitive advantages to the Company.
The computer industry is characterized by frequent litigation regarding
copyright, patent and other intellectual property rights. While there are no
currently known, pending or threatened patent or copyright claims against SCC,
or any of its subsidiaries, any such claim, if resolved unsatisfactorily, could
possibly have a material adverse effect on the Company's results of its
operations and financial condition. There can be no assurance that such third
party claims will not be asserted, or if asserted, that they will be resolved in
a satisfactory manner.
Dependence on Suppliers. Certain components used in the Company's products
are currently available from only a limited number of suppliers. The Company's
reliance on its suppliers involves several risks, including a potential
inability to obtain an adequate supply of required components, price increases,
timely delivery and component quality. Although to date, the Company has been
able to purchase its requirements of such components in a timely and effective
manner, there is no assurance that the Company will be able to obtain its full
requirements of such components in the future, or that prices of such components
will not increase. While the Company believes that there are several
alternatives and other suppliers of its components, the Company's inability to
obtain sufficient limited source components as required, or to develop
alternative sources if and as required in the future, could result in delays or
reductions in product shipments which could have a material adverse effect on
the Company's operations.
