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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
FORM 10-KSB
(Mark One)
X Annual Report Pursuant to Section 13 or 15(d) of
--- the Securities and Exchange Act of 1934
for the fiscal year ended December 31, 1996
or
--- Transition Report Pursuant to Section 13 or 15(d) of
the Securities and Exchange Act of 1934
for the transition period from ______to______
Commission File No. 1-13616
STORAGE COMPUTER CORPORATION
----------------------------
(Exact name of Registrant as specified in its charter)
DELAWARE 02-0450593
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11 RIVERSIDE STREET
NASHUA, NEW HAMPSHIRE 03062-1373
(Address of Principal Executive Offices) (Zip Code)
(603) 880-3005
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
$0.001 PAR VALUE COMMON STOCK AMERICAN STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NONE
(TITLE OR CLASS)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------ ------
Indicate by check mark if the disclosure of delinquent filers pursuant to Item
405 of Regulation S-B is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in a definitive proxy or information
statement incorporated in Part III of this Form 10-KSB or any amendments to this
Form 10-KSB. X
-----
The aggregate market value of the Common Stock of the Registrant held by
non-affiliates was approximately $41,528,505 as of March 27, 1997.
As of March 27, 1997, there were issued and outstanding 10,701,341 shares of the
Registrant's Common Stock, with a par value of $.001.
- --------------------------------------------------------------------------------
DOCUMENTS INCORPORATED BY REFERENCE
NONE
Transitional Small Business Disclosure Format Yes No X
----- -----
STORAGE COMPUTER CORPORATION
Securities and Exchange Commission
Item Numbers and Description
----------------------------
<TABLE>
<CAPTION>
PART I
PAGE
----
<S> <C> <C>
ITEM 1. Business...............................................................................................3
ITEM 2. Properties............................................................................................11
ITEM 3. Legal Proceedings.....................................................................................11
ITEM 4. Submission of Matters to a Vote of Security Holders...................................................12
PART II
ITEM 5. Market for Registrant's Common Equity
and Related Stockholder Matters.......................................................................12
ITEM 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................................................................14
ITEM 7. Financial Statements and Supplementary Data...........................................................21
ITEM 8. Changes In and Disagreements With Accountants
on Accounting and Financial Disclosure................................................................21
PART III
ITEM 9. Directors, Executive Officers, Promoters and Control Persons,
Compliance with Section 16(a) of the Exchange Act.....................................................22
ITEM 10. Executive Compensation................................................................................25
ITEM 11. Security Ownership of Certain Beneficial Owners
and Management........................................................................................27
ITEM 12. Certain Relationships and Related Transactions........................................................28
ITEM 13. Exhibits and Reports on Form 8-K......................................................................30
</TABLE>
Inasmuch as the calculation of shares of Registrant's voting stock held
by non-affiliates requires a calculation of the number of shares held by
affiliates, such figure, as shown on the cover page hereof, represents the
Registrant's best good faith estimate for purposes of this Annual Report on Form
10-KSB, and the Registrant disclaims that such figure is binding for any other
purpose. The aggregate market value of Common Stock indicated is based upon the
closing sale price of the Common Stock ($15.375) as reported by the American
Stock Exchange for trading on March 27, 1997. All outstanding shares
beneficially owned by executive officers and directors of the Registrant or by
any shareholder beneficially owning more than 5% of Registrant's common stock,
as disclosed herein, were considered solely for purposes of this disclosure to
be held by affiliates.
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<PAGE>
PART I
ITEM 1. BUSINESS
THE COMPANY
Storage Computer Corporation (the "Company" or "SCC") designs,
manufactures, markets and supports high-performance, scalable data storage
solutions, critical to success in high-availability commercial computing
environments. The Company pioneered the RAID 7(R) technology incorporated in its
Virtual Storage Architecture(TM), which forms the basis for all its disk array
product families. Based upon this performance-optimized architecture, the
Company's disk array product families combine high-end controller technology,
disk drives, scalable centralized and distributed memory mechanisms, proprietary
memory mapping techniques and a real-time operating system to deliver
high-performance, fault-tolerant storage solutions, in capacities ranging from
36 gigabytes to over 4 terabytes of shared storage.
COMPANY HISTORY
The Company's predecessor, Cab-Tek, Inc., began development of RAID
("Redundant Array of Inexpensive Disks") in late 1984. From 1984 to 1990,
products at RAID levels 3, 4, 5 and 6 were developed and tested. Development
then commenced on the Virtual Storage Architecture to overcome the performance
bottlenecks inherent in other RAID implementations and to achieve fault tolerant
storage without impeding performance. The resultant RAID 7 technology was
transferred to the Company, which was incorporated in Delaware in August, 1991.
Products based upon the Company's RAID 7 technology began shipping to customer
production sites in the second half of 1992.
Pursuant to the Agreement and Plan of Organization dated October 4,
1994, as amended by a First Amendment to the Agreement and Plan of Organization
dated January 31, 1995, Vermont Research Products, Inc. ("VRP"), a wholly-owned
subsidiary of the Company, acquired the entire business and substantially all
the property and assets of Vermont Research Corporation ("VRC") in exchange for
shares of the Company's Common Stock (the "Reorganization"). The Reorganization
became effective on March 6, 1995 and was accounted for as a pooling of
interests.
INDUSTRY OVERVIEW
The computer systems market is undergoing a dramatic shift to new
information processing modes, such as client/server computing incorporating
enterprise databases, data warehousing, image processing, multi-media,
video-on-demand, virtual reality processing and Internet/Intranet services.
These new application modes are increasing demand for data storage that is
scalable in terms of capacity, performance, connectivity and manageability. The
market for high performance storage is also driven by host computing platforms
which continue to make quantum leaps in processing performance. The Company
believes that users and networks will increasingly demand high-performance
storage systems to eliminate performance bottlenecks and to take full advantage
of increased server/workstation processing power. The U.S. Department of
Commerce estimates the data storage market in 1997 to be $100 billion, and
predicts that it will grow to $1 trillion by the year 2004.
-3-
RAID TECHNOLOGY
International Data Corporation ("IDC") reported that the multiuser disk
subsystems market was nearly $24 billion in 1996. RAID revenues accounted for
86% of the total multiuser disk subsystems market, with an annual growth factor
of 26%. IDC projects multiuser disk subsystems revenues of $27 billion in 1997.
RAID is an emerging data storage technology. A RAID disk array links
together several industry standard disk drives into a single large disk drive
using a combination of hardware, firmware and software to achieve extremely fast
data transfer rates, high levels of redundancy and large storage capacity at a
relatively lower cost than embedded storage solutions.
The following is a discussion of the performance capabilities of
various RAID levels as well as some of the common applications of RAID
technologies at such levels:
<TABLE>
<CAPTION>
RAID Level Attributes Applications
---- ----- ---------- ------------
<S> <C> <C>
RAID-0 Offers disk striping without parity Quick reads and writes for large files
without parity protection.
RAID-1: Disk Mirroring High data reliability but high cost due High reliability and fast data
to duplication of disk drives and transfer rates more than storage
associated hardware. capacity and cost.
RAID-3: Parallel Data Access Highest data transfer rate for large High data transfer rates for large
block sizes (high bandwidth) such as block writes.
images.
RAID-5: Independent Data High data transfer rate for small Applications that require frequent
Access transaction files. access to small blocks of data.
RAID-7: Asychronous Data Combines an asychronous hardware Multi-host environments with a mix of
Access environment with a multi-tiered cache application types.
memory controlled by an embedded
real-time operating system.
OmniRAIDTM Concurrent multiple RAID levels (0, 1, For mixed applications and data
3, 5, 7) applied to data, not to types. Protection at multiple levels
physical array topology. provides performance scaling.
</TABLE>
RAID 7 PRODUCTS
RAID 7 Virtual Storage Architecture
Storage Computer pioneered RAID 7 technology, implemented through its
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Virtual Storage Architecture, which forms the basis for all its disk array
product families. Based upon this architecture, the Company's disk array product
families combine high-end controller technology, standard disk drives, scalable
centralized and distributed memory mechanisms, proprietary memory mapping
techniques and a real-time operating system to deliver high-performance,
fault-tolerant storage solutions. The RAID 7 intelligent operating system
controls the interaction between the attached host processors and the physical
drives; it tracks where information is stored, by which host(s) that data can be
accessed and at what RAID level each piece of information is stored. Employing
dedicated SCSI channels for each disk drive, RAID 7 technology transfers data to
the host(s) and the processors asynchronously. In the extensions to the
architecture, additional performance optimizations are achieved by fully
distributing the intelligence, memory, parity and flow control throughout the
array.
The embedded operating system controls the data flow, thus reducing or
eliminating the processing bottlenecks inherent in many other RAID
implementations. The Company's embedded operating system manages several
components: the central and channel memory, the distributed processors for each
of the drives and the associated buffers, the distributed processors managing
each host and the related dedicated buffers, plus a high-speed data bus and
separate control bus. Each of these resources is controlled independently and
asynchronously.
OmniRAID and OmniForceTM
With the Company's OmniRAID and OmniForce software solutions, users can
select the appropriate level(s) of data protection within a broad range of
options. With these products, data protection levels can be customized by the
user, specifying the appropriate level of protection for every data transaction.
As requirements change and as new data is added, users can revise their
selections or add multiple, concurrent protection levels while optimizing
performance at the same time. OmniRAID and OmniForce allow users the freedom to
scale performance and data protection concurrently. The user may invoke
different levels of protection simultaneously for different data transactions to
achieve a cost-effective business continuance strategy and increased
performance.
OmniRAID. Storage Computer's recently introduced OmniRAID software
system combines features of many RAID levels. Concurrent support for RAID 0,
RAID 1, RAID 3, RAID 5 and RAID 7 within a single array is possible because the
RAID 7 architecture bases protection modes on the data and does not tightly
couple it to the underlying physical configuration.
OmniForce. With OmniForce, a new product offering announced in the
fourth quarter of 1996, currently undergoing initial shipments, Storage Computer
has developed a product to provide enterprise-level business continuance
services, designed and optimized specifically for the open systems environment.
This online data protection facility allows primary production sites to be
multi-level-mirrored, locally and/or remotely, to ensure "hot recovery" of
critical data to keep the business running with minimal interruption of service.
OmniForce multi-level, multi-site mirroring is an option suite supported across
the entire OmniRAID SuperServer product lines and is designed to be implemented
concurrently with all OmniRAID features.
OmniForce is a data continuity suite of disaster recovery tools which
provides multi-site, multi-level mirroring. OmniForce offers scalable data
continuity features, such as the ability to configure multiple concurrent levels
of local and remote data protection, based on data prioritization. OmniForce's
fully user-scalable protection at the file level, rather than the array level,
allows the user
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to choose the appropriate level of protection.
Storage Management
Storage AdministratorTM enhances the monitoring and control of the
Company's storage product using an open, standards-based management protocol,
SNMP (Simple Network Management Protocol), the industry-standard IP (Internet)
communications protocol and a built-in Ethernet LAN (local area network)
connection. This "open systems" design allows information from the Storage
Administrator to be accessed through any SNMP Management Station, and alarm
conditions can be sent to multiple managers simultaneously, anywhere in the
world, over local or remote network connections. Mission-critical applications
requiring uninterrupted access to data on the arrays are protected by
operational controls within the Storage Administrator which enable early
detection and automatic alert notification when any user-defined alarm
thresholds are reached.
Hardware
The Company provides three separate high-performance storage product
sets, based on the RAID 7 Virtual Storage Architecture. They include: the RAID 7
Storage Server (70- and 71-Series) products, the high-performance OmniRAID
Server (72-Series), and the enhanced performance OmniRAID SuperServer
(73-Series) and OmniRAID SuperServer/ES (74-Series).
70- and 71-Series Storage Servers. Based upon the Raid 7 Virtual
Storage Architecture, the 70- and 71-Series Storage Servers combine high-end,
intelligent controller technology, disk drives, a scalable distributed cache
memory mechanism, and a real-time operating system software environment to
deliver high performance, fault-tolerant storage. The 70-Series is available in
both desktop and rackmount configurations. The 71-Series is available in
rackmount and console configurations.
72-Series OmniRAID Server. The 72-Series OmniRAID Servers include the
Company's data-configurable RAID implementation with support for multiple
concurrent data protection levels. Both protection and performance levels for
data can be specified through the OmniRAID Table Vector Parity and Pipelining
features available in this storage server family. Initial rollout of these and
other capabilities took place with the announcement of OmniRAID in the fourth
quarter of Fiscal 1996, prior to which time these features were available only
on the Company's Storage SuperServer product line.
73-Series OmniRAID SuperServer. The OmniRAID SuperServer is a family of
performance-supercharged storage devices based on the RAID 7 Extended Virtual
Storage Architecture. Configurations include high-speed processors, larger base
memory, a dedicated SCSI channel for each drive, distributed intelligence, SNMP
management, Local Management Facility, all OmniRAID features and optional
support of OmniForce multi-level mirroring. Through OmniForce Intramirroring and
OmniRAID's Table Vector Parity, Pipelining, Post Write Parity and Dynamic Online
Expansion features, customers can specify RAID protection levels 0,1,3,5,7 at
the file or dataset level to scale both data protection and performance levels
while keeping costs under control. Internal transfer rates under the RAID 7
Extended Virtual Storage Architecture have been dramatically increased by fully
distributing the intelligence, memory, parity generation and flow control
throughout the array. The OmniRAID SuperServer family features a combination of
redundant power and cooling systems, multiple redundant array management
options, up to four hot-standby drives, non-volatile cache and optional fully
mirrored configurations.
-6-
74-Series OmniRAID SuperServer/ES. Like the 73-Series, this new
product, which made its public debut in March of 1997 at the Cebit trade show in
Hanover, Germany, is built upon the RAID 7 Extended Virtual Storage Architecture
and is available in base configurations of 130 GB (expandable to 4TB), with a
minimum 256MB of memory, and includes the full OmniRAID feature set. The
OmniRAID SuperServer/ES drive packaging makes it fully front-serviceable and
provides large storage capacity in a small footprint, allowing data center
managers to maximize use of their current computer room capacities.
CUSTOMERS AND APPLICATIONS
The Company has an extensive worldwide customer list. Products based
upon the Virtual Storage Architecture have been sold to customers across a broad
range of industries including banking and financial services, education,
technology, telecommunications, military/aerospace, general services,
government, and manufacturing. It is the goal of the Company to continue to
market to existing customers to leverage its multiple product offerings and to
continue to expand its customer base for its high-performance storage solutions.
CUSTOMER SERVICE AND SUPPORT
The Company offers its customers a full array of customizable support
options and programs. Customers have the option to decide how they want their
service and support structured, so that the maintenance of the customer's data
storage equipment fits into the customer's business model. Storage Computer's
technical services organization comprises a group of skilled support personnel,
located at Storage Computer's corporate headquarters in Nashua, NH and in field
locations in the U.S., Europe and Asia.
In addition to the Company's own support engineers and technicians, its
strategic service alliances with third-party service providers enable it to
offer comprehensive, high-quality programs to support customers on a worldwide
basis. Storage Computer's strategic service alliances formed with third-party
providers include some of the largest and most highly respected organizations in
the service industry. Those alliances include IBM Service Organization,
Technology Service Solutions (a subsidiary of IBM) and DecisionOne (the company
formed in the merger between Decision ServCom and Bell-Atlantic Service). All
in-house and third-party service technicians supporting the Company's customers
are trained by Storage Computer, and service parts are generally stocked in
local service offices. Service technicians are backed by a technical support
hotline staffed by support analysts at Storage Computer. Storage Computer always
takes the initial service call, determines the logistics of the support plan,
and manages the process. Onsite services may be tailored to customer
requirements in terms of hours covered, response times and onsite hardware
service providers.
COMPETITION
The information storage market is extremely competitive. Companies such
as Data General Corporation, Digital Equipment Corporation, EMC Corporation, IBM
Corporation,, Hewlett-Packard, NCR Corporation, Storage Technology, Sun
Microsystems, and more than 100 other public and private
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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, there can be no assurance
that the Company will be able to compete successfully against existing companies
or future entrants to the marketplace. While the Company believes that the
price-performance characteristics of its products are currently competitive,
increased competition including the introduction of new products by the
Company's competitors, could result in price reductions, reduced gross margin
and loss of market share, any of which could materially adversely affect the
Company's business, operating results and financial condition. Many of the
Company's current and potential competitors have significantly greater
financial, technical, marketing and other resources than the Company. As a
result, they may be able to respond more quickly to new or emerging technologies
and changes in customer requirements, or to devote greater resources to the
development, promotion, sale and support of their products than the Company. In
addition, current and potential competitors have established or may establish
cooperative relationships among themselves or with third parties. Accordingly,
it is possible that new competitors or alliances among competitors may emerge
and rapidly acquire significant market share.
SALES AND MARKETING
Domestic. The Company's products are sold domestically through a
combination of direct sales personnel, value-added resellers and other
distributors. The Company's direct sales organization coordinates the activities
of the Company's resellers and distributors and seeks to actively participate
with them in selling efforts in order to enable the Company to establish strong
direct ties with its customers and end users.
International. The Company has established several different
operational methods in order to penetrate and develop international markets. The
Company uses distributors and value-added resellers, combined with the selling
efforts of wholly-owned subsidiaries, and affiliated, minority-owned entities,
to penetrate certain international markets and maximize returns on its marketing
and sales efforts.
Storage Computer Europe, GmbH, a wholly-owned subsidiary of the Company
located in Kelkheim, Germany, provides sales and product support throughout
Central and Eastern Europe. In September 1992, the Company entered into a joint
venture agreement as a minority shareholder and formed Storage Computer (Asia)
Ltd. for the purpose of selling and servicing the Company's products in Hong
Kong and China. Similarly, in December 1995, the Company made a minority equity
investment in Open Storage Solutions, S.A., in France, for the purpose of
collaborating to sell and service products in France. Storage Computer (UK) Ltd.
manufactures products and supports the sales and service of the Company's
products in certain countries in Western Europe.
The remaining international markets served by the Company are
coordinated and supported from the United States, through the use of the
Company's independent distributor network. The Company's distributors are
responsible for penetrating and developing their respective markets, providing
support and maintenance services and maintaining an inventory of spare parts.
The distributors are also responsible to establish relationships with
value-added resellers, who sell the Company's products to final end users.
-8-
MANUFACTURING
The Company's manufacturing operations, which are located in Nashua,
New Hampshire, U.S.A. and Leatherhead, England, undertake procurement of
materials, product assembly, product assurance, quality control and final
testing. The Company's manufacturing strategy has been to develop close
relationships with its suppliers and subcontractors and to exchange critical
information, in order to minimize capital investment and overhead expenditures
and create flexibility for rapid expansion.
The Company relies upon a limited number of suppliers of several key
components utilized in the assembly of the Company's products. The Company
purchases disk drives and enclosures from a number of major disk drive
suppliers. The Company's reliance on its suppliers involves certain risks,
including a potential inability to obtain an adequate supply of required
components, price increases, timely delivery and component quality. This risk is
particularly significant with respect to suppliers of disk drives because in
order to meet product performance requirements, the Company must obtain disk
drives with extremely high quality and data storage capacity. In addition, there
is currently a significant market demand for disk drives and for semiconductor
memory components, which could result in component shortages, selective supply
allocations and increased prices of such components. Although to date the
Company has been able to purchase its requirements of such components, 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. In addition, there can be no assurance that problems with respect to
yield and quality of such components and timeliness of deliveries will not
occur. Disruption or termination of the supply of these components could delay
shipments of the Company's products and could have a material adverse effect on
the Company's business, operating results and financial condition.
RESEARCH AND DEVELOPMENT
Since its inception, the Company has made substantial investments in
research and development. The Company believes that its future performance will
depend in large part on its ability to maintain and enhance its current
products, develop new products that achieve market acceptance, maintain
technological competitiveness and meet an expanding range of customer
requirements.
The Company's future growth depends substantially upon the success of
the Company's RAID 7 Virtual Storage Architecture and related products as well
as new products which may be developed; however, there can be no assurance that
the Company's products will attain broad market acceptance. Due to the
complexity of the engineering effort required to produce new data storage
subsystem products, the development and commercial exploitation of new products
are subject to significant technical risks. There can be no assurance that new
products will be introduced on a timely basis or at all. If new products are
delayed or do not achieve market acceptance, the Company's business, operating
results and financial condition will be materially adversely affected. In
addition, there can be no assurance that customers will not defer orders in
anticipation of new product introductions by the Company or its competitors.
Products like those offered by the Company may contain undetected
software errors or failures when first introduced or as new versions are
released. There can be no assurance that, despite testing by the Company and by
current and potential customers, errors will not be found in new products after
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commencement of commercial shipments, resulting in loss of or delay in market
acceptance, which could have a material adverse effect upon the Company's
business, operating results and financial condition.
The Company's total expenses for research and development for fiscal
years 1996, 1995 and 1994 were approximately $2,785,000, $2,116,000 and
$1,901,000 respectively. The Company anticipates that research and development
expenses will increase in absolute dollars in future periods; however, the
amount of such increases cannot be accurately predicted. Research and
development efforts are expected to be focused on increasing the individual
capabilities and performance of existing products and developing new value added
software and hardware products to provide the Company's installed base with
greater functionality, as well as to attempt to expand that installed base. (For
a discussion of recent and ongoing research and development expenses, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations").
PROPRIETARY RIGHTS
The Company's policy is to protect its technology by, among other
things, filing patent applications with respect to technology considered
important to the development of its business. The Company has been awarded
certain U.S. patents and has additional U.S. patent applications pending.
Foreign counterparts of certain of these applications have been filed or may be
filed at the appropriate time. The Company decides on a case-by-case basis
whether and in what countries it will file foreign counterparts of a U.S. patent
application. The Company currently has been granted two U.S. patents and has
seven pending patent applications, some of which are continuations of
applications for which patents have already issued, that relate to various RAID,
storage, fault tolerance and associated technologies. Although the Company often
seeks patents on its products, the Company believes that patents are of less
significance in its industry than such factors as innovative skills and
technical expertise, frequency of product enhancements and timeliness and
quality of support services provided by the Company.
The Company believes that its products, trade marks and service marks
do not infringe on the proprietary rights of third parties. There can be no
assurance, however, that third parties will not assert infringement claims
against the Company in the future. If such a claim is made, the Company will
evaluate the claim as it relates to its products and, if appropriate, may seek a
license to use the protected technology. There can be no assurance that the
Company would be able to obtain a license to use any such protected technology
or that any such license could be obtained on terms that would not have a
material adverse effect on the Company. If the Company or its suppliers are
unable to license any such protected technology, the Company could be prohibited
from incorporating or marketing such products. The Company could also incur
substantial costs to redesign its products or to defend any legal action taken
against it. Should the Company's products be found to infringe protected
technology, the Company could be required to pay damages to the infringed party
or be enjoined from manufacturing and selling such products.
The Company requires all employees, and technical and other consultants
and advisors to execute confidentiality agreements upon the commencement of
employment or consulting relationships with the Company. These agreements
generally provide that all confidential information developed or made known to
the individual during the course of the individual's relationship with the
Company is to be kept confidential and not disclosed to third parties except in
specific circumstances. All of the Company's key technical employees have also
entered into agreements providing for the assignment of rights to inventions
-10-
made by them while in the employ of the Company. Although the Company continues
to take protective measures to protect its proprietary technology, there can be
no assurance that these measures will be successful. In addition, the laws of
certain foreign countries may not protect the Company's rights to the same
extent as U.S. law.
EMPLOYEES
As of December 31, 1996, the Company had 113 full time employees. Of
the total, 95 were based in the United States, 11 in the United Kingdom and 7 in
Germany. The Company's ability to develop, manufacture and market its products
and to establish and maintain a competitive position in its industry will
depend, in large part, upon its ability to attract and retain qualified
technical, marketing and managerial personnel, of which there can be no
assurance. The Company believes that its relations with its employees are good.
None of the Company's employees is represented by a collective bargaining
agreement.
ITEM 2. PROPERTIES
The Company currently leases, from an affiliate, a 35,000 sq. ft.
facility which is occupied by its light manufacturing, research and development
and office operations in Nashua, New Hampshire. In 1996, the Company paid a
monthly rental of $15,600 to lease this facility. The current monthly rental is
$16,300, which the Company believes is comparable to rentals of similar
properties in the area and indicative of the fair market rental which could be
obtained from an unrelated third party in an arm's-length transaction. See "Item
12 - Certain Relationships and Related Transactions." The Company leases all of
its domestic and international outside sales offices. All Company properties and
premises are adequately protected by insurance coverage. The Company believes
that its existing facilities are adequate for its current needs and that
additional space will be available as needed.
ITEM 3. LEGAL PROCEEDINGS
On December 14, 1994, Raul Kacirek, a former employee of the Company,
instituted a suit against the Company in Superior Court, Cheshire County, New
Hampshire (Dkr. No. 94-E-0102). The suit alleges that the plaintiff properly
exercised, in part, an employee stock option and is entitled to have up to
300,000 shares of Common Stock issued to him, but does not seek monetary
damages. The Company has filed responsive pleadings (including motions and
counterclaims) and believes that the options were not properly and timely
exercised, and that the Complaint is otherwise without merit, and it intends to
defend the case vigorously.
During the third quarter of 1995, Michael J. Flannery, former Vice
President of U.S. Sales, brought several legal actions against the Company
and/or its President and Chief Executive Officer, Theodore J. Goodlander, two of
which have been discharged as described below. On July 18, 1995, Mr. Flannery
charged the Company and Mr. Goodlander in Plymouth Superior Court, in Plymouth
County, Massachusetts, for wrongful termination of employment due to disability
and age discrimination, tortious interference with advantageous relations and
other allegations pertaining to his dismissal from the
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Company (Massachusetts Civil Action No. 95-154-A). On January 14, 1997, the
court dismissed Mr. Flannery's age and disability discrimination claims. The
Company believes that the remaining counts which were filed, and other claims
made by Mr. Flannery, are untrue and without merit, and that all obligations
owed to Mr. Flannery have been satisfied and paid in full. The remaining actions
have been, and will continue to be, vigorously contested.
The Company does not believe that its involvement in or the resolution
of the two legal proceedings discussed above will have a material effect upon
the Company's business, operating results or financial condition. The Company is
not presently aware of, or involved in, any other litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock is traded on the American Stock Exchange
under the symbol "SOS".
The following table sets forth the range of the high and low closing
sales prices for the Common Stock of the Company for the fiscal years ended
December 31, 1996 and 1995, as reported by the American Stock Exchange.
FISCAL 1996 High Low
---- ---
First Quarter $11.00 $8.25
Second Quarter $18.375 $8.25
Third Quarter $19.00 $12.25
Fourth Quarter $15.00 $10.375
FISCAL 1995 High Low
---- ---
First Quarter $13.75 $6.50
Second Quarter $11.875 $6.25
Third Quarter $10.25 $7.875
Fourth Quarter $10.125 $7.00
On March 27, 1997, there were 374 record holders of the Company's
Common Stock. The Company believes the actual number of beneficial owners of the
Common Stock is greater than the stated
-12-
number of holders of record because a number of the shares of the Company's
Common Stock is held in custodial or nominee accounts for the benefit of persons
other than the record holder.
The Company has never paid any dividends and does not anticipate paying
any dividends in the foreseeable future. The Company is also restricted from
paying dividends under the terms of its bank credit facility.
-13-
ITEM 6.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Storage Computer Corporation designs, manufactures, markets and
supports high-performance, scalable data storage solutions, critical to success
in high-availability commercial computing environments. The Company's
predecessor, Cab-Tek, Inc., began development of RAID ("Redundant Array of
Inexpensive Disks") in late 1984. From 1984 to 1990, products at RAID levels 3,
4, 5 and 6 were developed and tested. Development then commenced on the Virtual
Storage Architecture to overcome the performance bottlenecks inherent in other
RAID implementations and to achieve fault tolerant storage without impeding
performance. The resultant RAID 7 technology was transferred to the Company,
which was incorporated in Delaware in August, 1991. Products based upon the
Company's RAID 7 technology began shipping to customer production sites in the
second half of 1992. Pursuant to the Agreement and Plan of Reorganization dated
October 4, 1994, as amended by a First Amendment to the Agreement and Plan of
Reorganization dated January 31, 1995, VRP, a wholly-owned subsidiary of the
Company, acquired the entire business and substantially all the property and
assets of VRC in exchange for shares of the Company's Common Stock (the
"Reorganization"). The Reorganization became effective on March 6, 1995 and was
accounted for as a pooling of interests. Accordingly, the results of operations
of VRC are included in the accompanying financial statements for all periods
presented as if the Reorganization had occurred at the beginning of the earliest
financial reporting period presented. In connection with the Reorganization, the
Company registered certain shares with the Securities and Exchange Commission to
exchange with VRC shareholders whereby the Company became an SEC reporting
company for the first time. The combined financial reporting should be analyzed,
in the opinion of management, in the context that prior to March 6, 1995, the
Company and VRC operated as independent business concerns and had (i) no
coordination of business efforts, (ii) redundant expenses and (iii) independent
management.
Results of Operations
The following table reflects consolidated statement of operations
information stated as a percentage of net sales for the years ended December 31,
1996, 1995 and 1994.
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net sales 100.00% 100.00% 100.0%
Cost of goods sold 49.40 52.10 43.30
----- ----- -----
Gross Profit 50.60% 47.90% 56.70%
------ ------ ------
14
Operating Expenses
Selling and marketing 19.70 20.80 20.30
General and administrative 3.80 4.70 8.90
Research and development 9.00 9.10 13.10
Royalty expense 0.00 2.80 2.30
---- ---- ----
32.50 37.40 44.60
----- ----- -----
Operating income (loss) 18.10 10.50 12.10
----- ----- -----
Other income (expense) (.30) .10 3.60
----- ----
Income before income taxes 17.80 10.60 8.50
----- ----- ----
Provision for federal and state income taxes
Current tax expense (benefit) 6.00 3.80 7.20
Deferred tax expense (benefit) (4.60) (3.90) --
------ ------ --
1.40 (0.10) 7.20
---- ------ ----
Net income (loss) 16.40% 10.70% 1.30%
====== ====== =====
</TABLE>
NET SALES
Net sales for the year ended December 31, 1996 were approximately
$31,011,000, reflecting an increase in combined product sales of approximately
$7,881,000 or 34% compared with the year ended December 31, 1995. Net sales for
the year ended December 31, 1995 was approximately $23,130,000, reflecting an
increase in combined product sales of approximately $8,607,000 or 59% compared
with the year ended December 31, 1994.
The increase in net sales in 1996 and 1995 was principally the result
of increased international and domestic distribution channels utilizing
value-added resellers, the opening of corporate sales offices/locations,
increased marketing and sales efforts and expansion of the direct sales force.
The increase in sales is strictly due to the increase in the volume of products
sold. The Company did not initiate any material price changes during the period.
Total sales have been expressed as a percentage of sales by geographic
region as follows:
Year Ended Year Ended Year Ended
December 31, 1996 December 31, 1995 December 31, 1994
----------------- ----------------- -----------------
US Domestic Sales 47% 39% 47%
European Sales 23% 38% 26%
Other Regions 30% 23% 27%
-15-
The changes in percentages between 1995 and 1996 were primarily the
result of an increase in sales and marketing activities domestically including
the expansion of the US direct sales force and increased product awareness in
the United States.
The changes in percentages between 1994 and 1995 were primarily the
result of the acquisition of Vermont Research Corporation in 1995 which had a
higher level of international sales as a percentage of total sales, the
additional sales generated by the Western European sales office located in the
United Kingdom which was acquired as a result of the Reorganization in March of
1995 and independent factors associated with geographic market penetration and
product awareness on a region by region basis.
All US export sales are denominated in US dollars to limit the amount
of foreign currency risk. Domestic sales which occur through the Central
European sales office located in Germany are conducted in the local functional
currency. Domestic sales which occur through the Western European sales office
located in the United Kingdom are denominated primarily in US dollars. Export
sales from the European sales offices are substantially denominated in US
dollars. For a further discussion of foreign operations, see the analysis and
discussion of Foreign Operations in Note I in the accompanying financial
statements, pages F-29 through F-30 for a more detailed analysis of the
Company's net sales.
COST OF GOODS SOLD
Cost of goods sold for the years ended December 31, 1996, 1995 and 1994
was approximately $15,327,000, $12,054,000 and $6,295,000, respectively, or 49%,
52% and 43% of net sales.
The decrease in cost of goods sold percentage between 1996 and 1995 of
approximately 3 percentage points was primarily caused by the reduction in
component costs as a result of continued management of the outsourcing process,
downward market pricing of subcomponents such as DRAM, reduction of overhead
costs as a percentage of overall sales due to the elimination of certain
redundant manufacturing expenses associated with Vermont Research Corporation
and the allocation between cost of goods sold and other operating expenses. The
decrease was offset in part as a result of the sales mix shifting to larger
system sales that incorporate a larger percentage of non-proprietary components,
such as disk drives, which have a lower gross profit margin.
The increase in cost of goods sold percentage between 1995 and 1994 of
approximately 9 percentage points was primarily caused by the acquisition of
Vermont Research Corporation in 1995 which had a larger revenue base in 1994 to
spread its fixed overhead cost as a percentage of sales and a change in the
sales mix shifting to larger system sales that incorporate a larger percentage
of non proprietary components, such as disk drives, which have a lower gross
profit margin.
SALES AND MARKETING
-16-
Sales and marketing expenses for the years ended December 31, 1996,
1995 and 1994 were approximately $6,118,000, $4,821,000 and $2,948,000
respectively or 20%, 21% and 20% of net sales.
The dollar increase of approximately $1,297,000 and $1,873,000 between
1996 and 1995, and 1995 and 1994, respectively, is primarily attributed to
increased cost associated with the continued development and expansion of
international sales and marketing activities and expansion of domestic sales and
marketing efforts, including but not limited to, the expansion of a direct sales
force in 1996.
GENERAL AND ADMINISTRATIVE
General and administrative expenses for the years ended December 31,
1996, 1995 and 1994 were approximately $1,186,000, $1,090,000 and $1,296,000,
respectively or 3.8%, 4.7% and 8.9% of net sales.
The overall percentage decrease is primarily attributable to the sales
growth between 1994 to 1996. The relative stable dollar cost associated with
administrative expenses is attributable to the change in the mix of
administrative costs between years. The dollar increase between 1996 and 1995 is
a direct result of increased legal, accounting and other professional fees.
During the year ended December 31, 1994 VRC administration expenses accounted
for approximately 50% of the total true dollar cost of general and
administrative expenses and during 1995 a portion of these expenses were
eliminated due to the Reorganization.
RESEARCH AND DEVELOPMENT
Research and development expenses for the years ended December 31,
1996, 1995 and 1994 were approximately $2,785,000, $2,116,000 and $1,901,000,
respectively, or 9%, 9% and 13% of net sales.
The stabilization of the research and development expenses between 1996
and 1995 is directly attributable to the consolidation of the research and
development efforts to one location and the allocation of costs associated with
research and development efforts. The percentage decrease between 1995 and 1994
was primarily attributed to the Reorganization with VRC resulting in the
elimination of certain redundant expenses and integration of the separate
companies research and development departments.
ROYALTY EXPENSE
Royalty expense for the years ended December 31, 1996, 1995 and 1994
was approximately $0, $649,000 and $332,000 or 0%, 2.8% and 2.3% of net sales.
The elimination of the royalty expense was the result of the termination of the
royalty agreement, with a related party, by mutual consent.
OTHER INCOME/EXPENSE
The components of other income/expense for 1996 were approximately
$209,000 in interest expense, $56,000 of other income, $32,000 of interest
income and $29,000 of foreign exchange gain. The components of other
income/expense for 1995 were approximately $238,000 in interest expense,
$135,000 of a reorganization credit, $92,000 of other income, $85,000 of
interest income and $9,000
-17-
in foreign exchange gain. The components of other income/expense for 1994 were
approximately $506,000 of reorganization expense, $214,000 of interest expense,
$141,000 of interest income, $52,000 of foreign currency gain and $35,000 of
other income. For a further discussion and analysis of other income/expense see
Note A and Note E in the accompanying notes to the financial statements pages
F-15 and F-19, respectively.
PROVISION FOR FEDERAL AND STATE INCOME TAXES
Current tax expense
The current tax expense for the years ended December 31, 1996, 1995 and
1994 was approximately $1,862,000, $869,000 and $1,047,000 respectively or a
current tax rate based on income before income taxes of 34%, 35% and 85%. The
decrease in the current tax expense expressed as a percentage of income before
income taxes between 1996 and 1995 was primarily attributed to the timing of the
deduction of certain expenses for income tax purposes which were expensed for
financial statement purposes. The decrease in the current tax expense expressed
as a percentage of income before income taxes between 1995 and 1994 was
primarily the result of the combining of the financial reporting presentation of
SCC and VRC for the earliest financial reporting period whereby the net
operating loss of VRC had been fully reserved.
Deferred tax benefit
The deferred tax benefit for the years ended December 31, 1996, 1995
and 1994 was approximately $1,421,000, $896,000 and $319, respectively, or
approximately 28%, 36% and 0% of net income. The deferred tax benefit for 1996
and 1995 includes the recognition of certain net operating loss carryforwards
for financial reporting purposes.
See Note H in the accompanying note to the financial statements pages
F-26 through F-28, for a more detailed analysis of the Company's effective tax
rates and net deferred tax assets.
LIQUIDITY AND CAPITAL RESOURCES
The following table is a summary of the consolidated statements of cash
flows:
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995 December 31, 1994
<S> <C> <C> <C>
Net cash provided by
(used in) operating
activities $1,514,101 $(2,271,705) $(622,510)
Net cash used in
investing activities (483,058) (443,953) (413,678)
Net cash provided by
(used in) financing
activities (55,454) 297,710 (48,327)
</TABLE>
-18-
NET CASH PROVIDED BY USED IN OPERATING ACTIVITIES
From 1994 to 1996 the Company has gone from a negative cash flow from
operations to a positive cash flow from operations which has been driven by the
increase in net income from 1994 of approximately $183,000 to net income of
$5,061,000 in 1996. Net income generated by operations net of depreciation,
amortization and deferred tax benefit for the years ended December 31, 1996,1995
and 1994 was approximately $3,900,000, $2,000,000 and $360,000 which is a direct
result of the increase in sales activity from 1994 to 1996.
The impact sales growth has on the other major components of cash flow
from operations on a year to year analysis is illustrated by the following
table:
Accounts Payables and Sales growth
Receivable Inventory accrued expenses year to year
% of sales % of sales % of sales percentage
---------- ---------- ---------- ----------
1996 ....... 29.12% 20.00% 18.20% 34.07%
1995 ....... 31.18% 19.80% 19.70% 59.26%
1994 ....... 25.64% 19.17% 24.70% 49.50%
As illustrated by the table above the Company has historically been
able to generate sales growth percentages in excess of 30% for each year without
a significant deterioration in the aging of accounts receivable, no significant
increase of inventory levels as a percentage of sales and continued reduction of
current liabilities as a percentage of sales.
NET CASH USED IN INVESTING ACTIVITIES
The cash used in investing activities is primarily the result of the
purchase of property and equipment. The Company currently has no material
commitments for capital expenditures.
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
The cash flow provided by or used in financing activities for 1996 and
1995 was primarily caused by the utilization of the Company's unsecured demand
line of credit with a bank offset by the payment of bridge financing occurring
during the development stage of the Company. Cash flows from financing
activities in 1994 were primarily caused by the repayment of bridge financing
occurring during the development stage of the Company.
-19-
On August 20, 1996 the Company's unsecured, demand line of credit with
a bank was renewed with an increase in the credit facility from $6,000,000 to
$10,000,000. At December 31, 1996 the remaining balance available on the credit
facility was approximately $9,400,000. 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 agreement contains certain conditions including, but not limited to,
restrictions related to working capital, net worth, and certain financial
ratios.
The Company's working capital at December 31, 1996 was approximately
$11,400,000. In Management's opinion, the Company's current working capital
position, together with the available credit facility of $9,400,000 and cash
from foregoing operations, will be sufficient to accommodate working capital
requirements through the end of 1997.
FOREIGN CURRENCY TRANSACTIONS
Management does not currently utilize any derivative products to hedge
its foreign currency risk. The Company's foreign subsidiaries' obligations to
their parent are denominated in US dollars. There is a potential for a foreign
currency gain or loss based upon fluctuations between the US dollar and its
subsidiaries' functional currencies, currently the German mark and the British
pound. This exposure is limited to the period between the time of accrual of
such liability to the parent in the subsidiaries' functional currency and the
time of its payment in US dollars.
Other than the intercompany balances noted above, the Company does not
believe it has material unhedged monetary assets, liabilities or commitments
which are denominated in a currency other than the operations' functional
currency. Management expects such exposure to continue until its foreign
subsidiaries reach a more mature level of operation. Management currently has no
plans to utilize any derivative products to hedge its foreign currency risk.
INFLATION
The Company does not believe that inflation has had a material impact
on its operations, sales or net income during the period covered by this report.
FORWARD-LOOKING 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 subject to
numerous risks and uncertainties. Any statements made herein 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 markets and customers, the Company's objectives and plans for future
operations and products 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; the rate of growth in the industries of the Company's
products; the presence of competitors with greater technical, marketing and
financial resources; the Company's ability to promptly and effectively respond
to technological change to meet evolving customer needs; risks associated with
sales in foreign countries; and the Company's ability to successfully expand its
operations. See also Exhibit 99 to this Annual Report on Form 10-KSB for
additional factors to consider.
-20-
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Financial Statements and pages F-1 through F-30 attached
(audited annual financial statements for the years ended December 31, 1996 and
1995).
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
-21-
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS,
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information concerning executive
officers and directors of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Theodore J. Goodlander 52 Chairman of the Board, President and Chief Executive Officer, Director
Shigeho Inaoka(1)(2) 53 Director
Steve S. Chen(1)(2) 50 Director
Norunn Heilevang(2) 47 Treasurer
Christopher P.
Torregrossa, CPA 37 Vice President of Finance
John R. Taylor 57 Vice President of International Distribution
John J. O'Brien 46 Vice President of Research and Development
Ronald L. Beckett 52 Vice President of Operations
Sam Sanders 62 Vice President of North American Sales
</TABLE>
- --------------------
(1) Member of Compensation Committee
(2) Member of Audit Committee
THEODORE J. GOODLANDER, 53, has served as SCC's President, Chief Executive
Officer and Chairman of the Board for over five years and since he founded the
Company. Mr. Goodlander served as President of Cab-Tek, Inc., a computer
accessories manufacturing company and a predecessor to the Company, from 1981 to
1984. From 1978 to 1981, he was employed as a private investor and from 1968 to
1978 Mr. Goodlander held various management positions at Wang Laboratories,
Inc., including Vice President International and Far East Marketing Manager. Mr.
Goodlander attended Syracuse University and is a graduate of the Program for
Management Development at Harvard Business School.
SHIGEHO INAOKA, 54, has been a director of the Company since September, 1993.
Mr. Inaoka has served as President of TechnoGraphy, Inc., a manufacturer of
multimedia computer systems and an exclusive distributor of the Company's
products in Japan since 1992. From 1989 to 1992, Mr. Inaoka was President and
Chief Executive Officer of Sony Computer Systems, Inc. He received a business
degree from Meiji University in 1967 and a Masters degree in Computer Systems
Engineering from Tokyo Computer Academy in 1968.
-22-
STEVE S. CHEN, 50, has been a director of the Company since May, 1996. Mr. Chen
is also the Executive Vice President and Chief Technology Officer of Sequent
Computer Systems, Inc. Mr. Chen was previously the Founder and Senior Vice
President of Chen Systems, Inc., a high performance computer server
manufacturer, which was acquired by Sequent Computer Systems, Inc. in 1996.
Prior to that, Mr. Chen founded Supercomputing Systems, Inc., with partial
funding from IBM. He had previously been Senior Vice President of Cray Research,
with responsibility for development of the Cray XMP and YMP Supercomputers.
NORUNN HEILEVANG, 48, was appointed Treasurer in October 1994. Since 1982, Ms.
Heilevang has also served as Administration Manager of Cab-Tek Inc. From 1978 to
1982, she served as Vice President and Chief Financial Officer of Cizek Audio,
Inc. Ms. Heilevang holds an AA in Accounting from Forde Business College, Forde,
Norway.
CHRISTOPHER P. TORREGROSSA, CPA, 37, was promoted to Vice President of Finance
in March of 1997. Prior to his promotion Mr. Torregrossa functioned as the
Company's Corporate Controller from August 1995 to February 1997 and Corporate
Financial Auditor from October 1994 to July 1995. Prior to joining the Company
Mr. Torregrossa was employed at Nathan Wechseler and Company, the Company's
independent auditor from the Company's inception to 1994. He received his BS in
Accounting from the University of Denver in 1981 and became a Certified Public
Accountant in 1983. After graduation he was employed by Deloitte and Touche.
JOHN R. TAYLOR, 57, has served as SCC's Vice President - International
Distribution. Mr. Taylor served as President of EXSAM, an international
marketing and consulting company, from 1991 to 1992 and Vice President of
International Operations for Sequoia Systems from 1989 to 1991. He also served
as Vice President International Operations for ICL/Computer Consoles, Inc. from
1987 to 1989. Mr. Taylor also worked in various positions from field sales to
working directly with the Chief Executive Officer for Wang Laboratories from
1970 to 1987. Mr. Taylor is fluent in German.
JOHN J. O'BRIEN, 46, has served as Vice President of Research and Development
since joining the Company in 1992. From 1984 to 1992, Mr. O'Brien was a
consultant to Storage Computer, and during the period from 1987 to 1992, he did
so as President of MetaVenture Inc., a Manhattan based consulting company. He
received a B.S. in Mathematics from St. Vincent's College and B.S. in Electronic
Engineering from Pennsylvania State University. Mr. O'Brien also holds a Masters
degree in Engineering Administration from George Washington University.
RONALD L. BECKETT, 52, has served as SCC's Vice President of Operations since
1995. Prior to being named Vice President of Operations, Mr. Beckett served as
the Director of Field Service from 1994 to October of 1995 for Storage Computer.
Before joining Storage Computer, he served as the Program and Business Manager
at Wang Laboratories directing Worldwide MultiVendor product and service program
from 1988 to 1993. From 1985 to 1988, Mr. Beckett was the Vice President of
Operations for Rhema Computer. Previously, Mr. Beckett was the Manager of
Distributor and OEM sales support at Applicon Schlumberger from 1980 to 1984. He
attended Washington Institute of Technology and is a graduate from Merganhaler
Technical School majoring in Electronic Technology.
SAM SANDERS, 62, joined SCC in March 1997 as Vice President of North American
Sales. Immediately prior to joining Storage Computer, Sanders was CEO and
Founder of TAP, a sales and marketing consulting company, founded in 1989. His
sales and management experience at IBM, Wang Laboratories and Scientific Data
Systems over an 18-year period led to his appointment at Nucleus International,
where he served as Vice President of Worldwide Sales from 1984 to 1989. Sanders
is an engineering graduate of the University of California at Berkeley and has
pursued graduate studies toward his MBA at UCLA and The George Washington
University.
All directors hold office until the next annual meeting of the stockholders and
until their successors are elected and qualified. All officers of the Company
are elected annually by the Board of Directors and
-23-
serve at the Board's discretion. There are no family relationships among any of
the directors or executive officers of the Company.
BOARD COMMITTEES
The Board of Directors has a Compensation Committee, which makes
recommendations concerning salaries and incentive compensation for employees of,
and consultants to, the Company, and an Audit Committee, which reviews the
results and scope of the audit and other services provided by the Company's
independent auditors.
DIRECTOR COMPENSATION
Members of the Board of Directors do not receive any cash compensation
for their service on the Board of Directors but are entitled to reimbursement of
expenses related to attending Board of Directors meetings. The Company has
compensated its directors who are not employees through the grant of stock
options. Upon initial appointment, each of Messrs. Inaoka and Chen was granted
an option to purchase 30,000 shares of Common Stock at the fair market value on
the date of grant. Directors who are employees of the Company are not paid any
additional compensation for serving as directors.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires Directors, executive officers and persons who own more than 10% of the
outstanding shares of Common Stock of the Company to file with the Securities
and Exchange Commission and the American Stock Exchange reports of ownership and
changes in ownership of voting securities of the Company and to furnish copies
of such reports to the Company. Based solely on a review of copies of such
reports furnished to the Company or written representations from certain persons
that no reports were required for those persons, the Company believes that all
Section 16(a) filing requirements were complied with during the fiscal year
ended December 31, 1996 with the exception of Christopher P. Torregrossa, Steve
S. Chen, John J. O'Brien, John R. Taylor, Ronald L. Beckett and Sam Sanders, who
were recently named executive officers, and who have not yet filed Forms 3.
-24-
ITEM 10. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth certain information with respect to the
compensation paid or accrued by the Company for services rendered to the Company
in all capacities for the fiscal year ended December 31, 1996 by its Chief
Executive Officer and each of the Company's other executive officers whose total
salary and bonus exceeded $100,000 during such fiscal year (collectively, "the
Named Executive Officers"):
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION
COMPENSATION -------------
------------
OTHER ANNUAL STOCK ALL OTHER
NAME AND FISCAL SALARY BONUS COMPENSATION OPTIONS COMPENSA-
PRINCIPAL POSITION YEAR(1) $ $ ($)(2) (#) TION ($)(2)
--------- -------- ------- ----- ----- ------ --- -------- --
<S> <C> <C> <C> <C> <C> <C>
Theodore J. Goodlander,
President and Chief Executive
Officer.......................... 1996 $150,000(4) --- --- --- ---
John J. O'Brien,
Vice President of Research
and Development........... 1996 $102,667 --- --- 150,000(5) ---
John R. Taylor,
Vice Preident of International
Development.................... 1996 $100,000 $60,000 160,000(6) ___
</TABLE>
- --------------------
(1) The Company's fiscal year for 1996 ended on the last day of December.
(2) In accordance with the rules of the Securities and Exchange Commission,
other compensation in the form of perquisites and other personal
benefits has been omitted because such perquisites and other personal
benefits constituted less than the lesser of $50,000 or ten percent of
the total annual salary and bonus reported for the executive officer
during the fiscal year ended December 31, 1996.
(3) The Company did not grant any stock options, restricted stock awards or
stock appreciation rights (SARs) or make any long-term incentive plan
payouts to the above named executive officers during the fiscal year
ended December 31, 1996.
(4) As of December 31, 1996 Mr. Goodlander was owed deferred salary of
$299,500.
(5) Includes 150,000 options at $.10 per share pursuant to the Company's
Amended and Restated Stock Incentive Plan.
(6) Includes 120,000 options at $.10 per share and 40,000 at $3.60 per
share pursuant to the Company's Amended and Restated Stock Incentive
Plan.
-25-
The following table sets forth certain information concerning
exercisable and unexercisable stock options held by the Named Executive Officers
as of December 31, 1996:
Aggregated Option Exercises In Last Fiscal Year and
Fiscal Year-End Option Values(1)
<TABLE>
<CAPTION>
Number of Securities Underlying Value of Unexercised In-the-Money
Unexercised Options at Fiscal Year-End(1) Options at Fiscal Year-End(2)
-------------------------------------- ---------------------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
Name
- ----
<S> <C> <C> <C> <C>
John R. Taylor 140,000 20,000 $1,753,800 $190,200
John R. O'Brien 150,000 0 $1,953,750 __
</TABLE>
- ---------------------------
(1) No options were exercised during the fiscal year ended December 31,
1996 by the Named Executive Officers.
(2) Based on the difference between closing price of the underlying shares
of Common Stock on December 31, 1996 as reported by the American Stock
Exchange ($13.125) and the option exercise price.
-26-
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of the Common Stock as of December 31, 1996 by (i) each
director of the Company, (ii) each of the executive officers named in the
Summary Compensation Table above, (iii) all directors and executive officers of
the Company as a group and (iv) each person known by the Company to own
beneficially more than 5% of the Common Stock.
<TABLE>
<CAPTION>
Shares of Common Stock
Beneficially Owned(10)
----------------------
Directors, Officers and 5% Stockholders Number Percent
- --------------------------------------- ------ -------
<S> <C> <C>
Theodore J. Goodlander 4,000,000(1) 37.38%
Storage Computer Corporation
11 Riverside Street
Nashua, New Hampshire 03062
Goodlander 1990 Family Trust 3,290,000 30.74%
c/o Jeanie McCready, Trustee
6 Ashland Street
Nashua, New Hampshire 03020
Norunn Heilevang 216,500(2) 2.02%
8 Nigel Lane
Nashua, New Hampshire 03062
Shigeho Inaoka 453,600(3) 4.24%
2-16-7 Iwataminani
Komae-shi
Tokyo, Japan 182
Steve S. Chen 0(4) *
c/o Storage Computer Corporation
11 Riverside Street
Nashua, New Hampshire 03062
Christopher P. Torregrossa 0(5) *
10 Hillside Drive
Henniker, NH 03242
John R. Taylor 40,000(6) *
c/o Storage Computer Corporation
11 Riverside Street
Nashua, New Hampshire 03062
John J. O'Brien 195,400(7) *
c/o Storage Computer Corporation
11 Riverside Street
Nashua, New Hampshire 03062
Ronald L. Beckett 0(8) *
c/o Storage Computer Corporation
11 Riverside Street
Nashua, New Hampshire 03062
Sam Sanders 200(9) *
c/o Storage Computer Corporation
11 Riverside Street
Nashua, New Hampshire 03062
All directors and executive officers as a 8,000,300 74.76%
group(9)...............................................
</TABLE>
-27-
- --------------------
(1) Does not include 3,290,000 shares of Common Stock held by the
Goodlander 1990 Trust established for the exclusive benefit of Mr.
Goodlander's children and as to which Mr. Goodlander exercises no
voting or dispositive control and disclaims beneficial ownership.
(2) Does not include 50,000 shares of Common Stock issuable upon the
exercise of options granted under the Company's Amended and Restated
Stock Incentive Plan.
(3) Includes 211,000 shares of Common Stock held by TechnoGraphy, Inc. for
which Mr. Inaoka is an executive officer and in which he owns a
controlling interest. Does not include 30,000 shares of Common Stock
issuable upon exercise of options granted under the Company's Amended
and Restated Stock Incentive Plan and 20,000 shares held by family
members.
(4) Does not include 30,000 shares of Common Stock issuable upon the
exercise of options granted under the Company's Amended and Restated
Stock Incentive Plan.
(5) Does not include 25,000 shares of Common Stock issuable upon the
exercise of options granted under the Company's Amended and Restated
Stock Incentive Plan.
(6) Does not include 120,000 options at $.10 per share and 40,000 options
at $3.60 per share pursuant to the Company's Amended and Restated Stock
Incentive Plan.
(7) Does not include 150,000 Options at $.10 per share pursuant to the
Company's Amended and Restated Stock Incentive Plan.
(8) Does not include 26,000 options at an average cost of $8.59 per share
pursuant to the Company's Amended and Restated Stock Incentive Plan.
(9) Does not include 60,000 options at an average cost of $16.75 per share
pursuant to the Company's amended and Restated Stock Incentive Plan.
(10) See Footnotes (1) - (9) above.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CAB-TEK, INC.
SCC was spun off by Cab-Tek, Inc., a company which is owned by Mr.
Goodlander, Ms. Heilevang and related parties, through the purchase of the
related inventory and fixed assets used in connection with the development of
RAID 7. These assets were in turn contributed as the initial capital of SCC. SCC
subsequently purchased all of the RAID technology and the rights to all issued
and pending patents and trademark of Cab-Tek, Inc. for $10,000 plus a royalty of
3% of SCC's total net sales through March 30, 1996 (up to a cumulative maximum
royalty of $5,000,000). This royalty agreement was terminated effective December
31, 1995. No royalties were paid with respect to Fiscal 1996. Royalties with
respect to Fiscal 1995 were $649,000. The royalty rate was set within the range
of what management believed to be industry practice, and was substantially lower
than the rate management believes it would have accepted from a non-affiliated
party. The maximum royalty amount was set by management through analysis to
determine an amount reasonable and fair to both parties. Among the factors
considered in the analysis were the history of the related development expenses
and risks, the prospects for the Company's business and earnings, and the
development expenses of similar and competing companies. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Royalty Expense."
KRISTIANIA CORP.
SCC currently leases, as a tenant at will, a 35,000 sq. ft. facility
which is occupied by its light manufacturing, research
-28-
and development and office operations in Nashua, New Hampshire. The lease is
with an affiliated entity of which Mr. Goodlander and Ms. Heilevang are equity
owners. The Company paid annual rentals of $152,576 and $187,200 in 1995 and
1996, respectively.
RELATED PARTY DEBT
Since the inception of the Company, Mr. Goodlander and Cab-Tek, Inc. have made
secured cash loans to the Company at interest rates of prime plus 1%. In
December of 1994, the Cab-Tek note payable was assigned to Mr. Goodlander. The
aggregate amount owing to Mr. Goodlander under his own note and the note
assigned to him by Cab-Tek, Inc., for Fiscal 1996 and Fiscal 1995 was $710,000
and $910,000, respectively.
-29-
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following documents are included as part of the report:
(1) Financial Statements
The following financial statements of the Company and
the report of the independent certified public
accountants are filed as part of this report:
Index to Financial Statements
Report of Independent Auditors
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Financial Statements
(2) Financial Statement Schedules
None
(3) Exhibits
Certain of the exhibits listed hereunder have been
previously filed with the Commission as exhibits to
certain prior registration statements and periodic
reports as indicated in the footnotes below. The
location of each document so incorporated is
indicated by footnote.
*3.1 Restated Articles of Organization (Incorporated by
reference as Exhibit 3.1 to the Company's Form S-4,
Registration No. 33-87028, as filed on December 2, 1994).
*3.2 Amended and Restated By-Laws (Incorporated by reference as
Exhibit 3.2 to the Company's Form S-4, Registration No.
33-87028, as filed on December 2, 1994).
*4.1 Specimen Common Stock Certificate (Incorporated by
reference as Exhibit 4.1 to the Company's Form S-4,
Registration No. 33-87028, as filed on December 2, 1994).
10.1 Amended and Restated Stock Incentive Plan.
10.2 Promissory Note in the principal amount of $710,000 dated
December 6, 1996 made payable to Theodore J. Goodlander.
*10.3 Letter Agreement dated July 14, 1994 between the
Registrant and Eddie Lu Hwang (Incorporated by reference
as Exhibit 10.8 to the Company's Form S-4, Registration
No. 33-87028, as filed on December 2, 1994).
*10.4 Joint Venture Agreement between the Registrant, Micro
Research Computer Limited and Eddie Lu Hwang (Incorporated
by reference as Exhibit 10.6 to the Company's Form S-4,
Registration No. 33-87028, as filed on December 2, 1994).
*10.5 Amended and Restated 1992 Stock Incentive Plan
(Incorporated by reference as Exhibit 10.5 to Amendment
No. 4 to the Company's Form S-3, Registration No.
333-04145, as filed on September 13, 1996).
10.6 Amendment dated August 20, 1996, to the Revolving Credit
Agreement dated August 6, 1995 between the Company and
State Street Bank and Trust Company.
-30-
10.7 $10,000,000 Line of Credit Note from Registrant to State
Street Bank and Trust Company dated August 20, 1996.
*10.8 Loan Agreement dated August 6, 1995 between the Company
and State Street Bank and Trust Company (Incorporated by
reference to Exhibit 10.2 to Amendment No. 4 to the
Company's Form S-3, Registration No. 333-04145, as filed
on September 13, 1996.
21 Subsidiaries of the Company.
23 Consent of Richard A. Eisner & Company, LLP.
27 Financial Data Schedule.
99 "Safe Harbor" Statement under Private Securities
Litigation Reform Act of 1995.
- --------------------
* previously filed
(b) Reports on Form 8-K
None.
-31-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in Nashua, New Hampshire,
on the 28th day of March, l997.
STORAGE COMPUTER CORPORATION
BY:/s/ Theodore J. Goodlander
-----------------------------
Theodore J. Goodlander
President, Chief Executive Officer and
Chief Financial Officer
Pursuant to the requirements of the Securities and Exchange Act of l934, this
report has been signed below by the following persons on behalf of the
registrant and in their capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
- --------- -------- ----
<S> <C> <C>
/s/ Theodore J. Goodlander Chairman of the Board of Directors, CEO March 28, 1997
- --- -------- -- ---------- (Principal Executive Officer and
Theodore . Goodlander Principal Accounting Officer)
/s/ Shigeho Inaoka Director March 28, 1997
- --------------------------
Shigeho Inaoka
________________________ Director ________________, 1997
Steven S. Chen
</TABLE>
-32-
STORAGE COMPUTER CORPORATION
- I N D E X -
PAGE
NUMBER
REPORT OF INDEPENDENT AUDITORS F-2
CONSOLIDATED BALANCE SHEETS AS AT
DECEMBER 31, 1996 AND DECEMBER 31,
1995 F-4
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996,
DECEMBER 31, 1995 AND DECEMBER 31, 1994 F-6
CONSOLIDATED STATEMENTS OF STOCKHOLDERS'
EQUITY FOR THE YEARS ENDED DECEMBER 31,
1996, DECEMBER 31, 1995 AND DECEMBER 31, 1994 F-8
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996,
DECEMBER 31, 1995 AND DECEMBER 31, 1994 F-10
NOTES TO FINANCIAL STATEMENTS F-12
F-1
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors
Storage Computer Corporation
Nashua, New Hampshire 03062
We have audited the accompanying consolidated balance sheets of Storage
Computer Corporation and subsidiaries as at December 31, 1996 and December 31,
1995, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Storage
Computer Corporation and subsidiaries as at December 31, 1996 and December 31,
1995, and the consolidated results of their operations and their consolidated
cash flows for each of the years in the three-year
F-2
period ended December 31, 1996 in conformity with generally accepted accounting
principles.
Richard A. Eisner & Company, LLP
New York, New York
January 31, 1997
F-3
STORAGE COMPUTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
A S S E T S 1996 1995
----------- ------ -----
<S> <C> <C>
Current assets:
Cash and cash equivalents. . . . . . . . . $ 1,852,762 $ 871,101
Accounts receivable (Note E) . . . . . . . 9,030,955 7,212,091
Inventories (Note B) . . . . . . . . . . . 6,274,244 4,580,066
Prepaid expenses and other current assets. 103,796 140,754
Deferred tax asset (Note H). . . . . . . . 400,000 529,997
------------ -----------
Total current assets. . . . . . . . 17,661,757 13,334,009
Deferred tax asset (Note H) . . . . . . . . . 2,138,550 588,000
Property and equipment (net of accumulated
depreciation and amortization of
$1,155,165 in 1996 and $1,195,662 in
1995) (Note C) . . . . . . . . . . . . . . 1,080,002 790,605
Investment in affiliates. . . . . . . . . . . 55,000 55,000
------------ -----------
T O T A L . . . . . . . . . . . . . $20,935,309 $14,767,614
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable (Note D). . . . . . . . . . . $ 576,421 $ 399,973
Current portion of capital leases and
equipment note (Note F). . . . . . . . . 29,753 39,677
Accounts payable . . . . . . . . . . . . . 2,201,556 2,350,730
Accrued expenses . . . . . . . . . . . . . 2,236,853 990,171
Accrued income taxes . . . . . . . . . . . 935,600 931,016
Deferred stockholder compensation
(Note E) . . . . . . . . . . . . . . . . 299,500 299,500
------------ -----------
Total current liabilities . . . . . 6,279,683 5,011,067
------------ -----------
Capital lease obligations and equipment
note, noncurrent (Note D). . . . . . . . . 32,672 61,594
Long-term debt, related party
(Note D) . . . . . . . . . . . . . . . . . 710,000 910,000
------------ -----------
Total long-term liabilities . . . . 742,672 971,594
------------ -----------
Commitments and contingencies (Notes E, F and J)
Stockholders' equity (Note G):
Preferred stock, par value $.001;
authorized 25,000,000 shares;
none issued and outstanding
Common stock, par value $.001; authorized 25,000,000 shares;
issued and outstanding 10,701,341 shares (1996) and
10,636,341 shares (1995) . . . . . . . . 10,701 10,636
Additional paid-in capital . . . . . . . . 12,290,245 12,223,860
Retained earnings (deficit). . . . . . . . 1,612,008 (3,449,543)
------------ ------------
Total stockholders' equity. . . . . 13,912,954 8,784,953
------------ -----------
T O T A L . . . . . . . . . . . . . $20,935,309 $14,767,614
============ ===========
</TABLE>
F-4
The accompanying notes to financial statements
are an integral part hereof.
F-5
STORAGE COMPUTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Net sales . . . . . . . . . . . . . . . . . . $31,011,429 $23,130,413 $14,522,887
Cost of goods sold. . . . . . . . . . . . . . 15,326,909 12,054,265 6,295,256
------------ ------------ -----------
Gross profit. . . . . . . . . . . . 15,684,520 11,076,148 8,227,631
------------ ------------ -----------
Operating expenses:
Selling and marketing. . . . . . . . . . . 6,117,947 4,820,680 2,948,324
General and administrative . . . . . . . . 1,186,239 1,089,797 1,295,858
Research and development . . . . . . . . . 2,785,280 2,116,542 1,901,091
Royalty expense (Note F) . . . . . . . . . 648,558 331,862
------------ ------------ -----------
10,089,466 8,675,577 6,447,135
------------ ------------ -----------
Operating income. . . . . . . . . . 5,595,054 2,400,571 1,750,496
------------ ------------ -----------
Other income (expense):
Reorganization (expense) credit (Note A) . 134,821 (506,088)
Foreign exchange gain. . . . . . . . . . . 29,407 8,763 51,785
Interest income. . . . . . . . . . . . . . 31,673 84,804 140,497
Interest expense (Note E). . . . . . . . . (209,495) (238,414) (213,826)
Other income . . . . . . . . . . . . . . . 55,892 92,402 34,748
------------ ------------ -----------
(92,523) 82,376 (492,884)
------------ ------------ ------------
Equity in net loss of affiliates. . . . . . . (23,390) (28,087)
------------ ------------
Income before income taxes. . . . . 5,502,531 2,459,557 1,229,525
------------ ------------ -----------
Provision for federal and state income taxes (Note H):
Current tax expense. . . . . . . . . . . 1,861,533 869,164 1,046,859
Deferred tax (benefit) . . . . . . . . . (1,420,553) (896,202) (319)
------------ ------------ ------------
440,980 (27,038) 1,046,540
------------ ------------ -----------
NET INCOME. . . . . . . . . . . . . . . . . . $ 5,061,551 $ 2,486,595 $ 182,985
============ ============ ===========
Net income per share. . . . . . . . . . . . . $0.43 $0.21 $0.02
====== ====== =====
Weighted shares outstanding . . . . . . . . . 11,891,373 11,784,441 10,836,324
=========== =========== ==========
</TABLE>
F-6
The accompanying notes to financial statements
are an integral part hereof.
F-7
STORAGE COMPUTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Cumulative
Common Stock Additional Retained Foreign
----------------------------- Paid-In Earnings Currency
Shares Par Value Capital (Deficit) Translation
-------- ----------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance -
December 31,
1993. . . . . . . 9,701,341 $ 9,701 $ 9,215,344 $(6,119,123) $(14,629)
Equity adjustment
from foreign
currency
translation . . . 14,629
Sales of common
stock . . . . . . 136,500 137 477,434
Conversion of debt
into common
stock . . . . . . 543,500 543 1,905,137
Net income . . . . . 182,985
----------- -------- ------------ ----------- -------------
Balance -
December 31,
1994. . . . . . . 10,381,341 10,381 11,597,915 (5,936,138) - 0 -
Conversion of debt
into common
stock (Note D). . 135,000 135 624,865
Exercise of stock
options . . . . . 120,000 120 1,080
Net income . . . . . 2,486,595
----------- -------- ------------ ----------- -------------
Balance -
December 31,
1995. . . . . . . 10,636,341 10,636 12,223,860 (3,449,543) - 0 -
Exercise of stock
options . . . . . 65,000 65 66,385
Net income . . . . . 5,061,551
----------- -------- ------------ ----------- -------------
BALANCE -
DECEMBER 31,
1996. . . . . . . 10,701,341 $10,701 $12,290,245 $ 1,612,008 $ - 0 -
=========== ======== ============ ============ =======
</TABLE>
F-8
The accompanying notes to financial statements
are an integral part hereof.
F-9
STORAGE COMPUTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------
1996 1995 1994
------------ ---------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 5,061,551 $ 2,486,595 $ 182,985
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 310,505 302,041 216,093
Deferred tax (benefit) (1,420,553) (896,202) (319)
Amortization of debt discount 74,854
Equity in net loss of affiliates 23,390 28,807
Gain on foreign currency translation adjustment (29,407) (8,763) (51,785)
Gain on sale of property (14,668)
Changes in operating assets and liabilities:
Accounts receivable (1,818,864) (3,487,958) (1,401,656)
Inventories (1,694,178) (1,796,189) (1,423,200)
Other current assets 2,955 (68,979) 41,445
Accounts payable and accrued expenses 1,102,092 1,099,506 1,799,788
------------ ------------ -----------
Net cash provided by (used in) operating
activities 1,514,101 (2,271,705) (622,510)
------------ ------------ ------------
Cash flows from investing activities:
Proceeds from the sale of property 34,500
Capital expenditures (483,058) (388,953) (448,178)
Investment in affiliate (55,000)
------------ ------------ ------------
Net cash (used in) investing activities (483,058) (443,953) (413,678)
------------ ------------ ------------
Cash flows from financing activities:
Net proceeds from credit line 176,448 399,973
Repayment of long-term debt and capital lease
obligations (98,352) (15,263) (525,898)
Repayment of long-term debt, related party (200,000)
Net proceeds from issuance of common stock 66,450 477,571
Reduction of other long-term liabilities (87,000)
------------ ------------ ------------
Net cash provided by (used in) financing
activities (55,454) 297,710 (48,327)
------------ ------------ ------------
Effect of exchange rate changes on cash 6,072 943 5,969
------------ ------------ -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 981,661 (2,417,005) (1,078,546)
Cash and cash equivalents - beginning of year 871,101 3,288,106 4,366,652
------------ ------------ -----------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 1,852,762 $ 871,101 $ 3,288,106
============ ============ ===========
Supplemental disclosures of cash flow information: Cash payments for:
Interest $ 132,747 $ 141,865 $ 125,949
Taxes 1,831,338 1,035,000 35,000
Supplemental schedule of noncash financing activities:
Equipment acquired under capitalized lease $ 77,000 $ 24,000
============ ===========
Equipment financed by long-term debt $ 12,000
===========
Debt converted to common stock 135,000 shares issued 1995; 543,500 shares
issued 1994:
Increase in common stock 135 543
Increase in additional paid-in capital 624,865 1,905,137
------------ -----------
DECREASE IN DEBT $ 625,000 $ 1,905,680
============ ===========
</TABLE>
F-10
The accompanying notes to financial statements
are an integral part hereof.
F-11
STORAGE COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(NOTE A) - Nature of Business and Significant Accounting Policies:
[1] Nature of business:
The Company is engaged in the development, manufacture and
sale of computer disk arrays and computer equipment worldwide. The term
"Company" means, unless the context requires otherwise, the Company and its
subsidiaries and their respective predecessors.
[2] Significant accounting policies:
(a) Principles of consolidation:
The consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries, Storage
Computer Europe GmBH, and Vermont Research Products, Inc. and its
subsidiary, Storage Computer UK Ltd. All significant intercompany
accounts and transactions have been eliminated. The Company accounts
for its investments in Storage Computer (Asia) Ltd. and Storage
Computer France, SA, 20%-owned affiliates, by the equity method of
accounting.
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 SCC common stock ("the
Reorganization"). The Reorganization was accounted for as a pooling of
interests. Accordingly, the results of operations of Vermont Research
Products, Inc. are included in the consolidated financial statements
for all periods presented as if the Reorganization had been consummated
at the beginning of the earliest period presented. The transaction
required the issuance of approximately 748,000 shares of the Company's
common stock. In connection with the Reorganization, the Company
accrued certain expenses in 1994 resulting in an expense charge of
$506,088. Actual expenses were less than anticipated resulting in a
credit of $134,821 in 1995.
The following is a reconciliation of 1994 sales and
net income to include the operations of Vermont Research Products,
Inc.:
(continued)
F-12
STORAGE COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
Net Income
Net Sales (Loss)
------------ ----------
Storage Computer Corporation. $11,983,279 $1,118,192
Vermont Research Products, Inc. 2,539,608 (935,207)
------------ ----------
Combined $14,522,887 $ 182,985
============ ==========
(continued)
F-13
STORAGE COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(NOTE A) - Nature of Business and Significant Accounting Policies:
(continued)
[2] Significant accounting policies: (continued)
(a) Principles of consolidation: (continued)
Summary results of operations for the 1995 period
prior to the consummation of the Reorganization
(January 1, 1995 to March 6, 1995) are not available.
(b) Inventories:
Inventories are stated at the lower of cost
(first-in, first-out method) or market.
(c) Depreciation and amortization:
Depreciation and amortization of property and
equipment is computed using both the straight-line and accelerated
methods over the following useful lives:
Years
-----
Computer equipment. . . . . . . . . 5 - 7
Machinery and equipment . . . . . . 5 - 7
Office equipment. . . . . . . . . . 5 - 7
Leasehold improvements. . . . . . . 15
Research and development equipment. 5 - 7
Vehicle . . . . . . . . . . . . . . 5
(d) Revenue recognition:
The Company recognizes revenue when its products are
shipped to its customers.
(e) Cash and cash equivalents:
The Company considers all highly liquid instruments
with a maturity of three months or less, when acquired, to be cash
equivalents.
(continued)
F-14
STORAGE COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(Continued)
F-15
(NOTE A) - Nature of Business and Significant Accounting Policies:
(continued)
[2] Significant accounting policies: (continued)
(f) Earnings per share:
Earnings or loss per share data is computed using the
weighted average number of common shares outstanding and dilutive
common equivalent shares.
(g) Warranty costs:
The Company offers various maintenance and warranty
agreement plans. The Company provides for future warranty costs based
on actual claims experience.
(h) Stock-based compensation:
The Financial Accounting Standards Board has issued
Statement of Accounting Standards No. 123, "Accounting for Stock- Based
Compensation" ("SFAS 123"). As permitted under SFAS 123, the Company
has adopted the disclosure requirements of SFAS 123 and will account
for its employee stock option plans under Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees".
(i) Use of estimates:
The preparation of financial statements in conformity
with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amount of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
F-16
STORAGE COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(NOTE B) - Inventories:
(Continued)
At December 31, 1996 and December 31, 1995, the components of
inventories were as follows:
December 31,
------------
1996 1995
---- ----
Raw materials and
purchased components . . . . . $4,476,995 $2,128,947
Work in process . . . . . . . . . 888,396 615,200
Finished goods. . . . . . . . . . 908,853 1,835,919
----------- ----------
$6,274,244 $4,580,066
=========== ==========
(continued)
F-17
STORAGE COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(NOTE C) - Property and Equipment:
Included in property and equipment for the years ended December 31,
1996 and December 31, 1995 is equipment acquired under capital lease of
approximately $101,000. Property and equipment are stated at cost and are
summarized as follows:
December 31,
------------
1996 1995
---- ----
Computer equipment and
software. . . . . . . . . . . . $ 653,151 $ 370,139
Machinery and equipment. . . . 790,277 939,869
Office equipment . . . . . . . 220,453 117,885
Vehicles . . . . . . . . . . . 179,024 191,303
Research and development
equipment . . . . . . . . . 310,328 318,604
Leasehold improvements . . . . 81,934 48,467
------ ------
T o t a l. . . . . . 2,235,167 1,986,267
Less accumulated depreciation
and amortization. . . . . . 1,155,165 1,195,662
----------- ----------
B a l a n c e. . . . $1,080,002 $ 790,605
=========== ==========
(NOTE D) - Indebtedness:
Details of the Company's indebtedness are as follows:
(a) Note payable:
As of December 31, 1996, the Company had an unsecured demand
bank line of credit with maximum borrowings of $10,000,000. During the term of
the agreement, borrowings bear interest at the bank's prime rate, which was
8.25% at December 31, 1996. The agreement contains certain conditions including,
but not limited to, restrictions related to working capital, net worth, and
certain financial ratios.
(b) Long-term debt related party:
(Continued)
F-18
STORAGE COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
Note payable to the president of the Company is due January
1998 with interest at prime plus 1%, unsecured and subordinated to the demand
line of credit.
(continued)
F-19
STORAGE COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(NOTE E) - Related Party Transactions:
The Company leased its U.S. headquarter facilities in 1996 from an
affiliated entity as a tenant-at-will for a monthly rental of $15,600. Rent
expense under this lease for 1996, 1995 and 1994 amounted to $187,200, $152,576
and $105,456, respectively. The monthly rental increased to $16,300 effective
January 1, 1997.
Interest expense from related parties amounted to $84,000, $91,000 and
$80,604 for 1996, 1995 and 1994, respectively.
The deferred compensation payable due to the President is due on
demand.
For 1996, 1995 and 1994 the Company had sales to affiliates of
approximately $2,021,000, $1,700,000 and $442,000, respectively. Included in
accounts receivable at December 31, 1996 and December 31, 1995 are amounts due
from affiliates of approximately $887,000 and $731,000, respectively.
In connection with the acquisition of certain patent rights, the
Company paid a royalty to an affiliate of $648,558 and $331,862 in 1995 and
1994, respectively. The royalty agreement was terminated by mutual consent at
the end of 1995.
(NOTE F) - Lease Obligations:
[1] Operating leases:
The Company leases certain property and equipment under
noncancelable leases which expire at various dates through 2001.
Future minimum payments are as follows:
Year Ending
December 31,
------------
1997. . . . . . . . . . . . . $207,092
1998. . . . . . . . . . . . . 133,252
1999. . . . . . . . . . . . . 93,627
2000. . . . . . . . . . . . . 7,285
(Continued)
F-20
STORAGE COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
2001. . . . . . . . . . . . . 5,731
--------
$446,987
========
Amounts charged to operations under these leases were $203,415,
$185,009 and $13,872 for the years ended December 31, 1996, December 31, 1995
and December 31, 1994, respectively.
(continued)
F-21
STORAGE COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(NOTE F) - Lease Obligations: (continued)
[2] Capital leases and equipment note:
Present value of capital leases and
equipment note at December 31, 1996. $62,425
Less amounts due within one year. . . . 29,753
--------
Amounts due after one year. . . . . . . $32,672
========
(NOTE G) - Stock Option Plan:
The Company has a stock option plan which provides for the granting of
options to purchase up to 2,500,000 shares of common stock. Option activity
during 1994, 1995 and 1996 is summarized as follows:
Weighted-Average
Number of Option Price
Shares Per Share
Balance - December 31, 1993 . . . .. 1,723,500 $ .25
Granted . . . . . . . . . . . . 642,700 $ 3.57
Cancelled . . . . . . . . . . . (497,000) $ .25
----------
Balance - December 31, 1994 . . 1,869,200 $ 1.33
Granted . . . . . . . . . . . . 121,950 $ 2.81
Exercised . . . . . . . . . . . (120,000) $ .10
Cancelled . . . . . . . . . . . (363,750) $ 2.49
----------
Balance - December 31, 1995 . . 1,507,400 $ 1.35
Granted . . . . . . . . . . . . 382,000 $10.01
Exercised . . . . . . . . . . . (65,000) $ 1.02
Cancelled . . . . . . . . . . . (160,900) $ 3.32
----------
Balance - December 31, 1996 . . 1,663,500 $ 3.41
==========
F-22
STORAGE COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
Options for 1,228,101 shares are exercisable at December 31, 1996 at
exercise prices ranging from $.01 to $14.75 and a weighted-average price of
approximately $1.52 per share, with a weighted-average remaining contractual
life of approximately 9 years. At December 31, 1996, options to purchase 651,500
shares were available for grant under the plan.
(continued)
F-23
STORAGE COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(NOTE G) - Stock Option Plan: (continued)
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation," and applies Accounting Principles
Board Opinion No. 25 and related interpretations in accounting for its plans.
There was no compensation expense recognized in 1996 or 1995. If the Company had
elected to recognize compensation cost for the plans based on the fair value at
the grant date for awards under the plans, consistent with the method prescribed
by SFAS No. 123, net income per share would have been changed to the pro forma
amounts indicated below:
Year Ended December 31,
-----------------------
1996 1995
----------- ---------
Net income:
As reported. . . . . . . . . . . $5,061,551 $2,486,595
Pro forma. . . . . . . . . . . . 4,874,280 2,453,295
Net income per share:
As reported. . . . . . . . . . . $0.43 $0.21
Pro forma. . . . . . . . . . . . 0.41 0.21
The fair value of the Company's stock options used to compute pro forma
net income and net income per share disclosures is the estimated present value
at grant date using the Black-Shoales option-pricing model with the following
weighted average assumptions for 1996 and 1995: dividend yield of 2.5%; expected
volatility of 30%; a risk free interest rate of 7.5%; and an expected holding
period of ten years.
The weighted-average grant-date fair value of options granted was $4.10
per share and $1.57 per share for the years ended December 31, 1996 and December
31, 1995, respectively.
(continued)
F-24
STORAGE COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(NOTE H) - Income Taxes:
As of December 31, 1996 and December 31, 1995, the Company has net
deferred tax assets as shown in the following table.
December 31,
------------------------
1996 1995
---------- ----------
Deferred wages. . . . . . . . . $ 115,128 $ 102,000
Deferred inventory
capitalization costs . . . . 15,522 10,168
Deferred revenue. . . . . . . . 112,606 40,000
Accrued expenses. . . . . . . . 32,000 20,000
General business tax credits. . 360,000 360,000
Domestic net operating loss
carryover. . . . . . . . . . 2,061,843 2,380,000
Foreign net operating loss
carryover. . . . . . . . . . 736,152 613,800
----------- -----------
Total deferred tax
assets. . . . . 3,433,251 3,525,968
Valuation allowance . . . . . . (894,701) (2,407,971)
----------- ------------
Net deferred tax assets . . . . 2,538,550 1,117,997
Less current portion. . . . . . 400,000 529,997
----------- -----------
Noncurrent. . . . . . . . . . . $2,138,550 $ 588,000
=========== ===========
The domestic net operating loss carryovers, amounting to approximately
$6,000,000 expire at various dates through 2009 and the foreign net operating
loss carryovers amounting to approximately $1,700,000 can be carried forward
indefinitely. The Company is subject to Internal Revenue Code provisions which
limit the domestic
(continued)
F-25
STORAGE COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
net operating loss carryovers available annually. The general business tax
credits expire at various dates through 2001.
(continued)
F-26
STORAGE COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(NOTE H) - Income Taxes: (continued)
The U.S., foreign and state and local components of the provision
(benefit) for income taxes are as follows:
December 31,
-----------------------------------
1996 1995 1994
---------- ----------- ----------
Current:
Federal, net of business tax
credits of $50,000, $115,000
and $122,000 in 1996, 1995
and 1994, respectively. . . . .$ 1,514,000 $ 691,000 $ 864,000
State and local . . . . . . . . . 348,000 178,000 183,000
------------ ---------- ----------
1,862,000 869,000 1,047,000
------------ ---------- ----------
Deferred:
Federal. . . . . . . . . . . . . . (1,223,000) (358,000)
Foreign. . . . . . . . . . . . . . (198,000) (538,000)
------------ ----------
(1,421,000) (896,000)
---------- --------
Provision (benefit) for income
taxes. . . . . . . . . . . . . . .$ 441,000 $ (27,000) $1,047,000
============ ========== ==========
The following table reconciles the tax provision per the accompanying
statements of operations with the expected provision obtained by applying
statutory rates to the pretax income.
<TABLE>
<CAPTION>
1996 1995 1994
------------ ----------- --------
<S> <C> <C> <C>
Income before income taxes . . . . . . $ 5,502,531 $2,459,577 $1,229,525
============ =========== ==========
Expected tax at U.S. statutory rate
of 34%. . . . . . . . . . . . . . . $ 1,871,000 $ 836,000 $ 418,000
Adjustments due to:
Difference between foreign rate
and U.S. statutory rate . . . . . 165,000 85,000
State taxes, net of federal benefit 230,000 99,000 118,000
Increase (decrease) in valuation
reserve . . . . . . . . . . . . .(1,513,000) (947,000) 492,000
Adjustment of prior years'
deferred tax assets related to
foreign entities. . . . . . . . . (295,000)
Tax credits . . . . . . . . . . . . (50,000) (115,000) (122,000)
(Continued)
F-27
STORAGE COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
Nontaxable income . . . . . . . . . (56,000) 205,000
Other . . . . . . . . . . . . . . . 33,000 71,000 (64,000)
------------ ----------- -----------
Tax provision (benefit) per financial
statements. . . . . . . . . . . . . $ 441,000 $ (27,000) $1,047,000
============ =========== ==========
</TABLE>
For the years ended December 31, 1995 and December 31, 1994, nontaxable
income relates primarily to costs incurred with the Company's reorganization
with Vermont Research Products, Inc.
(Note A).
(continued)
F-28
STORAGE COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(NOTE I) - Foreign Operations:
Operations by geographic area are summarized as follows:
<TABLE>
<CAPTION>
United
States Europe Eliminations Consolidated
----------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
1996:
Domestic sales to
unaffiliated customers . $14,636,000 $3,538,000 $18,174,000
Export sales to
unaffiliated customers . 10,124,000 2,713,000 12,837,000
Transfers between
geographic areas . . . . 4,245,000 1,296,000 $(5,541,000)
------------ ----------- ------------
Total revenue . . . $29,005,000 $7,547,000 $(5,541,000) $31,011,000
============ =========== ============ ===========
Net income (loss). . . . . $ 5,196,000 $ 809,000 $ (943,000) $ 5,062,000
Total assets . . . . . . . 25,621,000 4,980,000 (9,666,000) 20,935,000
Total liabilities. . . . . 10,048,000 4,476,000 (7,502,000) 7,022,000
1995:
Domestic sales to
unaffiliated customers . $ 8,928,000 $5,260,000 $14,188,000
Export sales to
unaffiliated customers . 6,328,000 2,613,000 8,941,000
Transfers between
geographic areas . . . . 6,414,000 290,000 $(6,704,000)
------------ ----------- ------------
Total revenue . . . $21,670,000 $8,163,000 $(6,704,000) $23,129,000
============ =========== ============ ===========
Net income (loss). . . . . $ 2,466,000 $ (103,000) $ 124,000 $ 2,487,000
Total assets . . . . . . . 16,307,000 3,661,000 (5,200,000) 14,768,000
Total liabilities. . . . . 6,464,000 3,996,000 (4,477,000) 5,983,000
1994:
Domestic sales to
unaffiliated customers . $ 6,832,000 $3,029,000 $ 9,861,000
Export sales to
unaffiliated customers . 4,145,000 517,000 4,662,000
Transfers between
geographic areas . . . . 2,399,000 179,000 $(2,578,000) - 0 -
------------ ----------- ------------ ---------
(Continued)
F-29
STORAGE COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
Total revenue . . . $13,376,000 $3,725,000 $(2,578,000) $14,523,000
============ =========== ============ ===========
Net income (loss). . . . . $ 938,000 $ (555,000) $ (200,000) $ 183,000
Total assets . . . . . . . 11,615,000 1,966,000 (2,853,000) 10,728,000
Total liabilities. . . . . 4,755,000 2,000,000 (1,699,000) 5,056,000
</TABLE>
(continued)
F-30
STORAGE COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(NOTE I) - Foreign Operations: (continued)
Total revenue by geographic area includes both sales to unaffiliated
customers and transfers between geographic areas. Such transfers are accounted
for at prices which the Company considers comparable to normal, unaffiliated
customer sales.
Export sales from the United States to unaffiliated customers are
summarized as follows:
1996 1995 1994
------------ ----------- ----------
Far East . . . . $ 8,563,000 $4,542,000 $3,009,000
Other. . . . . . 1,561,000 1,786,000 1,136,000
------------ ----------- ----------
$10,124,000 $6,328,000 $4,145,000
============ =========== ==========
For the years ended December 31, 1996, December 31, 1995 and December
31, 1994 sales to one unaffiliated customer were in excess of 10% of net sales
and amounted to $6,303,000, $2,756,000 and $1,881,000, respectively.
(NOTE J) - Legal Proceedings:
A former employee of the Company has instituted a suit against the
Company alleging that he is entitled to have up to 300,000 shares of common
stock issued to him under an option arrangement. The Company has filed
responsive pleadings (including motions and counterclaims) and believes that the
option was not properly and timely exercised, and that the complaint is
otherwise without merit, and intends to defend the case vigorously.
STORAGE COMPUTER CORPORATION RESTATED
AND AMENDED STOCK INCENTIVE PLAN
1. Purpose of Plan
The Restated and Amended Stock Incentive Plan (the "Plan") is intended
to promote the long-term interests of the Company and it shareholders by
providing directors, consultants, officers and other employees of the Company
with an additional incentive arising from capital stock ownership to promote the
financial success of, and to provide future services to, the Company. Those
provisions of the Plan which make reference to Section 422 of the Code (as
defined below) shall apply only to ISOs (as defined below).
2. Definitions
Unless otherwise required by the context, the following terms when used
in the Plan shall have the meaning set forth in this Section 2:
(a) "Affiliate": Any "parent corporation" or "Subsidiary
corporation" of the Company, as such terms are defined in Sections 424(e) and
(f), respectively, of the Code.
(b) "Agreement": An option agreement evidencing an Award in such
form as adopted by the Committee pursuant to the Plan.
(c) "Award": The grant of an Option under the Plan.
(d) "Board of Directors" or "Board": The Board of Directors of the
Company.
(e) "Change in Control": A "Change in Control" occurs if the
Company (i) ceases operations; (ii) merges or consolidates with another entity
and is not the surviving entity; (iii) sells or otherwise transfers
substantially all of its operating assets; or (iv) if more than fifty percent
(50%) of the capital stock of the Company is transferred in a single transaction
or in a series of related transactions other than a public offering of stock of
the Company.
(f) "Code": The Internal Revenue Code of 1986, as amended from
time to time.
(g) "Committee": The Compensation Committee of the Board of
Directors or such other committee appointed by the Board of Directors which
meets the requirements set forth in Section 10(a) hereof.
(h) "Company": Storage Computer Corporation, a Delaware
corporation.
(I) "Effective Date": The date on which the Plan shall become
effective as set forth in section 11 hereof.
(j) "Exchange Act": The Securities Exchange Act of 1934, together
with all regulations and rules issued thereunder.
(k) "Exercise Price": In the case of an Option, the price per
Share at which the Shares subject to such Option may be purchased upon exercise
of such Option.
(l) "Fair Market Value": As applied to a specific date, the
closing price, if any, of the Company's Common Stock on such date as reported by
the American Stock Exchange or such other exchange on which the Company's Common
Stock may then be traded, or, if none, the fair market value shall be the
closing price of the Company's Common Stock on the nearest date before the
grant. The Fair Market Value determined by the Committee or the Board in good
faith in such manner shall be final, binding and conclusive on all parties.
(m) "ISO": An Option is intended to qualify as an "incentive stock
option", as defined in Section 422 of the Code or any statutory provision that
may replace such Section.
(n) ""NQSO": An Option not intended to be an ISO and designated to
Nonqualified Stock Option by the Committee.
(o) "Option": Any ISO or NQSO granted under the Plan.
(p) "Original Plan": The 1992 Stock Incentive Plan adopted by the
Board of Directors on September 1, 1992.
(q) "Participant": A non-employee director, officer, consultant or
other key employee of the Company who has been granted an Award under the Plan.
(r) "Plan": This Storage Computer Corporation restated and Amended
Stock Incentive Plan, as the same may be amended from time to time.
(s) "Reporting Person": Such persons as are required to file
reports under Section 16(a) of the Exchange Act.
(t) "SEC": Securities and Exchange Commission.
(u) "Shares": Shares of the Company's authorized but unissued or
reacquired $.001 par value Common Stock, or such other class or kind of shares
or other securities as may be applicable pursuant to the provisions of Section
4(b) hereof.
3. PARTICIPANT
-2-
The class of persons eligible to receive Awards under the Plan shall be
those officers, directors, consultants and other employees of the Company as
designated by the Committee from time to time.
4. SHARES SUBJECT TO PLAN
(a) Maximum Shares. Subject to adjustment by the operation of Section
4(b) hereof, the maximum number of Shares with respect to which Options may be
granted under the Plan is 2,500,000 shares. The Shares with respect to which
Options may be granted under the Plan may be either authorized and unissued
shares or issued shares heretofore or hereafter reacquired and held as treasury
shares. An award shall not be considered to have been made under the Plan with
respect to an Option to the extent that it terminates without being exercised,
and new Awards may be granted under the Plan with respect to the number of
Shares as to which such termination has occurred.
(b) Adjustment of Shares and Price. In the event that the Shares are
changed into or exchanged for a different kind or number of Shares of stock or
securities of the Company as the result of any stock dividend, stock split,
combination of shares, exchange of shares, merger, consolidation,
reorganization, recapitalization or other change in capital structure, than the
number of Shares subject to this Plan and to Awards granted hereunder and the
purchase or Exercise Price for such Shares shall be equitably adjusted by the
Committee to prevent the dilution or enlargement of Awards, and any new stock or
securities into which the Shares are changed or for which they are exchanged
shall be substituted for the Shares subject to this Plan and to Awards granted
hereunder; provided, however that fractional Shares may be deleted from any such
adjustment or substitution.
5. GENERAL TERMS AND CONDITIONS OF OPTIONS
(a) General Terms. The Committee shall have full and complete authority
and discretion and as otherwise expressly limited by the Plan, to grant Options
and to provide the terms and conditions (which need not be identical) among
Participants thereof. In particular, the Committee shall prescribe the following
terms and conditions with respect to any Options:
(i) the Exercise Price of any Option determined in
accordance with Section 5(b) hereof.
(ii) the number of Shares subject to and the expiration
date of any Option, provided, however that no Option
shall have a term in excess of ten years from the
date of grant of the Option.
-3-
(iii) the manner, time and rate (cumulative or otherwise)
of exercise of such Option: provided that no Option
shall be exercisable earlier than one year from the
date of grant.
(iv) the restrictions, if any to be placed upon such
Option or upon Shares which may be issued upon
exercise of such Option. The Committee may as a
condition of granting any Option require that a
Participant agree not to exercise thereafter one or
more Options previously granted to such Participant.
(v) provisions, if any, for automatic vesting of any
Option upon a "Change in Control" of the Company
(b) Exercise Price. The exercise price of any Option shall be
determined by the Committee. With respect to an ISO, the Exercise Price of an
Optional shall not be less than 100% (or with respect to any participant owning
more than 10% of the combined voting power of all classes of the Company's or an
Affiliate's Stock, (110%) of the Fair Market Value per Share on the date of the
grant. If the Company engages in a merger or business combination with another
entity. Options may be issued under the Plant at a price lower than Fair Market
Value per share to employees of such other entity who hold employee options to
purchase securities of such entity and who become employees of the Company or of
a subsidiary of the Company, provided that the Exercise Price and number of
shares shall be determined by the Committee generally in accordance with the
principles set forth in Section 4(b) above. To the extent permitted by the Code,
the Committee may designate such options as ISO'S.
Notwithstanding the foregoing, in no event shall the Exercise Price of
an Option be less than the par value per Share.
6. EXERCISE OF OPTIONS
(a) General Exercise Rights. An Option granted under the Plan shall be
exercisable during the lifetime of the Participant to whom such Option was
granted only by such Participant and, except as provided in Section 6(c), no
such Option may be exercised unless at the time such Participant exercises such
Option, such Participant is an employee, director or consultant of, and has
continuously since the grant thereof been an employed, director or consultant of
the Company. A leave of absence by an employee at the request or with the
approval of the Company shall not be deemed an interruption or termination of
employment, so long as the period of such leave does not exceed 180 days, or, if
longer, so long as the Participant's right to re-employment with the Company is
guaranteed by contract, applicable law, a vote of the Board of Directors or the
Company's corporate policy in effect on the date such leave commences. An Option
also shall contain such conditions upon exercise
-4-
(including, without limitation, conditions limiting the time of
exercise to specified periods) as may be required to satisfy applicable
regulatory requirements, including, without limitation, Rule 16b-3 (or any
successor rule) promulgated by the SEC.
(b) Notice of Exercise. An Option may not be exercised with respect to
less than 100 Shares, unless the exercise relates to all Shares covered by the
Options at the date of exercise. An Option shall be exercised by delivery of
written notice to the Company. Such notice shall state the election to exercise
the Option and the number of whole Shares in respect of which it is being
exercised, and shall be signed by the person or persons so exercising the
Option. In the case of an exercise of an Option such notice shall either: (a) be
accompanied by payment of the full Exercise Price and all applicable withholding
taxes, in which event the Company shall deliver any certificate(s) representing
Shares which the Participant is entitled to receive as a result of the exercise
as soon as practicable after the notice has been received; or (b) fix a date
(not less than 5 nor more than 15 business days from the date such notice has
been received by the Company) for the payment of the full Exercise Price and all
applicable withholding taxes, against delivery by the Company of any
certificate(s) representing Shares which the Participant is entitled to receive
as a result of the exercise. Payment of such Exercise Price and withholding
taxes shall be made as provided in Sections 6(d) and 9 hereof, respectively. In
the event the Option be exercised pursuant to Section 6(c)(i) hereof, by any
person or persons other than the Participant, such notice shall be accompanied
by appropriate proof of the right of such person or persons to exercise the
Option.
(c) Exercise After Termination of Employment. Subject to Section 6(a)
and except as otherwise determined by the Committee at the date of the grant of
the Option, upon termination of a Participant's employment with the Company,
such Participant (or in the case of death, the persons) to whom the Option is
transferred (by will or the laws of descent and distribution) may exercise such
Option during the following periods of time (but in no event after the normal
expiration date of such Option) to the extent that such Participant was entitled
to exercise such Options at the date of such termination:
(i) in the case of termination as a result of death,
disability or retirement of the Participant, the
Option shall remain exercisable for one year after
the date of termination; for this purpose,
"disability" shall mean such physical or mental
condition affecting the Participant as determined by
the Committee in its sole discretion and "retirement"
shall mean voluntary retirement under a retirement
plan or program of the Company;
(ii) in the case of termination for cause or the
Participant's voluntary resignation, the Option shall
immediately terminate and shall no longer be
exercisable; and
-5-
(iii) in the case of termination for any reason other than
those set forth in subparagraphs (i) and (ii) above,
the Option shall remain exercisable for three months
after the date of termination.
TO THE EXTENT THE OPTION IS NOT EXERCISED WITHIN A TIMELY MANNER AS SET FORTH
ABOVE, AND IN THE PROPER MANNER AS PRESCRIBED HEREIN, THE OPTION SHALL
AUTOMATICALLY TERMINATE AT THE END OF THE APPLICABLE PERIOD OF TIME.
Notwithstanding the foregoing provisions, failure to exercise an ISO within the
periods of time prescribed under Sections 421 and 422 of the Code shall cause an
ISO to cease to be treated as an "incentive stock option" for purposes of
Section 421 of the Code.
(d) Payment of Option Exercise Price. Upon the exercise of an Option,
payment of the Exercise Price shall be made either (I) in cash (by certified
check, bank draft or money order), (ii) with the consent of the Committee and
subject to Section 6(c) hereof, by delivering the Participant's duly executed
promissory note and related documents, (iii) with the consent of the Committee,
by delivering Shares already owned by the Participant valued at Fair Market
Value; provided that no shares received upon exercise of the Option thereafter
may be exchanged to pay the Option price for additional Shares within the
following six months, or (iv) by a combination of the foregoing forms of
payment.
(e) Payment with Loan. The Committee may in its sole discretion assist
any Participant in the exercise of one or more Options granted to such
Participant in the exercise of one or more Options granted to such Participant
under the Plan by authorizing the extension of a loan to such Participant from
the Company. Except as otherwise provided in this Section 6(e), the terms of any
loan (including the interest rate and terms of repayment) shall be established
by the Committee in its sole discretion. The maximum amount of any loan shall
not exceed 80% of the Exercise Price payable from the Shares being purchased.
Any such loan by the Company shall be with full recourse against the Participant
to whom such loan is granted, shall be secured in whole or in part by the Shares
so purchased, and shall bear interest at a rate not less than the minimum
interest rate required at the time of purchase of the Shares in order to avoid
having imputed interest or original issue discount under Sections 483 or 1202 of
the Code. In addition, any such loan by the Company shall become immediately due
and payable in full at the option of the Company, upon termination of the
Participant's employment with or service to the Company for any reason
whatsoever, or upon a sale of any shares acquired with such loan to the extent
of the cash and fair market value of any property received by the Participants
in such sale. The Committee may make arrangements for the application of payroll
deduction from compensation payable to the Participant to amounts owing to the
Company under any such loan. Until any loan by the Company under this Section
6(e) is fully paid in cash, the Shares shall be pledged to the Company as
security for such loan and the Company shall retain physical possession of the
stock certificates evidencing the Shares so purchased together with a duly
executed stock power for such Shares. No loan shall be made hereunder unless
counsel for the Company shall be satisfied that the loan and the
-6-
issuance of Shares funded thereby, will be in compliance with all applicable
federal, state and local laws.
(f) Rights as a Shareholder. A Participant shall have no rights as a
shareholder with respect to any Shares issuable or exercise of any Option, until
the date of the issuance of a stock certificate to the Participant for such
Shares. No adjustment shall be made for dividends (ordinary or extraordinary,
whether in cash, securities or other property) or distributions or other rights
for which the record date is prior to the date such stock certificate is issued,
except as provided in Section 4(b) hereof.
(g) Effect of Merger, Etc. In the event of a consolidation or merger or
sale of all or substantially all of the assets of the Company in which
outstanding shares of Common Stock are exchanged for securities, cash or other
property of any other corporation or business entity, or in the event of a
liquidation of the Company, the Board of Directors of the Company or the Board
of Directors of any Corporation assuming the obligations of the Company, may in
its discretion take any one or more of the following actions, as to outstanding
options: (i) provide that such options shall be assumed, or equivalent options
shall be substituted, by the acquiring or succeeding corporation (or an
affiliate thereof), provided that any such options substituted for ISO'S shall
meet the requirements of Section 424 of the Code; (ii) upon written notice to
the optionees, provide that all unexercised options will terminate immediately
prior to the consummation of such transaction unless exercised by the optionee
within a specified period following the date fo such notice; (iii) in the event
of a merger under the terms of which holders of the Common Stock of the Company
will receive upon consummation thereof, a cash payment for each share
surrendered in the merger (the "Merger Price"), make or provide for a cash
payment to the optionees equal to the difference between (A) the Merger Price
times the number of shares of Common Stock subject to such outstanding options
(to the extent then exercisable at prices not in excess of the Merger Price) and
(B) the aggregate exercise price of all such outstanding options in exchange for
the termination of such options; and (iv) provide that all or any outstanding
options shall become exercisable in full immediately prior to such event;
provided that notwithstanding anything to the contrary in this Section 6(g), any
action taken by the Board of Directors hereunder shall be in compliance with
Rule 16b-3 and the conditions thereof necessary to maintain qualification of the
Plan uncer Rule 16b-3. In the case of any Option which by the terms of the grant
thereof (or the agreement or instrument governing such grant) or pursuant to a
decision by the Board of Directors under this Section 6(g) provides for such
Option becoming fully exercisable upon a Change In Control or otherwise under
this Section 6, such Option shall be deemed vested on the day immediately prior
to the day on which such Change in Control occurs and Participants holding such
Options shall be given prior written notice of such Change in Control sufficient
to permit them to exercise such Options.
(h) Manner of Exercise. Subject to the conditions set forth in the
Plan, the Participant may exercise the Option(s) with respect to all or any part
of the number of such
-7-
shares then exercisable. The options evidenced by an Award, may be exercised
subject to the requirements herein set forth by:
(i) giving written notice to exercise the option with
respect to a specified number of full shares;
(ii) exercising as to not less than one hundred (100)
shares at any one time, unless the number of shares
to be purchased upon such exercise is the total
number remaining under such Option granted;
(iii) making full payment to the Company of the amount of
such Option Price for the number of shares with
respect to which the option is then exercised, in
accordance with the terms and conditions of Section 6
herein; and
(iv) executing an undertaking and such other documents as
the Company, in its sole discretion, shall deem
necessary to lawfully effectuate the transfer of
shares, evidencing the exercise of the option and/or
to determine whether registration is then required
under the Securities Act of 1993, or any other laws
then in effect.
(i) Exercise of Option and Termination. The right of exercise is
cumulative so that if the Option is not exercised to the
maximum extent perimssible during any exercise period, it is
exercisable, in whole or in part, with respect to all shares
not so purchased, at any time prior to the Expiration Date,
Last Exercise Date or earlier termination of any such Option.
No Option may be exercised at any time on or after the
Expiration Date, for any reason whatsoever. Subject to the
provisions of Section 6 herein, to the extent that any Option,
in whole or in part, is not exercised in a timely manner, the
Option shall terminate and the shares shall automatically
revert to the Plan.
7. SPECIAL PROVISIONS FOR ISOs
Any provision of the Plan to the contrary notwithstanding, the
following special provisions shall apply to all ISOs granted under the Plan:
(i) the Option must be expressly designated as an ISO by
the Committee and in an Award;
(ii) no ISO shall be granted more than ten years from the
effective date of the Original Plan and no ISO shall
be exercisable more than ten years from the date such
ISO is granted;
-8-
(iii) the Exercise Price of any ISO shall not be less than
the Fair Market Value per Share on the date such ISO
is granted; provided however, that with respect to an
ISO granted to any individual who, at the time such
ISO is granted, owns stock possessing more than 10%
of the total combined voting power of all classes of
stock of the Company or any Affiliate, the Exercise
Price of such ISO shall be at least 110% of the Fair
Market Value per Share at the date of grant;
(iv) the aggregate Fair Market Value (determined as of the
time any ISO is granted) of any Company stock with
respect to which any ISOs granted to a Participant
are exercisable for the first time by such
Participant during any calendar year (under this Plan
and all other stock option plans of the Company and
any predecessor) shall not exceed $100,000 as
required under Section 422 of the Code. (To the
extent $100,000 limit is exceeded, the $100,000 in
Options, measured as described above, granted earlier
in time will be treated as ISOs), and
(v) any other terms and conditions as may be required in
order that the ISO qualifies as an "incentive stock
option" under Section 422 of the Code or successor
provision.
8. RESTRICTIONS ON TRANSFERS; GOVERNMENT REGULATIONS
(a) Awards not Transferable. No Option nor any interest of a
Participant under the Plan in any instrument evidencing any Option under the
Plan may be assigned, encumbered or transferred, except, in the event of the
death of a Participant, by will or the laws of descent and distribution or, in
the case of NQSOs, pursuant to a qualified domestice relations order as defined
by the Code or Title 1 of the Employee Retirement Income Security Act or rules
thereunder.
(b) Government Regulations. This Plan, the granting of Awards under
this Plan and the issuance or transfer of Shares (and/or payments of money)
pursuant thereto, are subject to all applicable Federal and state laws, rules
and regulations and to such approvals by any regulatory or governmental agency
(including without limitation "no action" positions of the Securities and
Exchange Commission) which may, in the opinion of counsel to the Company, be
necessary or advisable in connection therewith.
Without limiting the generality of the foregoing, no Awards may be
granted under this Plan, and no Shares shall be issued by the Company, nor cash
payments by the Company, pursuant to or in connection with any such Award,
unless and until, in each such case, all legal requirements applicable to the
issuance or payment, which, in the opinion of counsel to
-9-
the Company, have been complied with in all respects. In connection with any
stock issuance or transfer, the person acquiring the Shares shall, if requested
by the Company, give assurances satisfactory to counsel to the Company, in
respect of such matters as the Company may deem desirable to assure compliance
with all applicable legal requirements. The Company shall not be required to
deliver any Shares under the Plan prior to (i) the admission of such Shares to
listing or for quotation on any stock exchange, or automated quotation system on
which such Shares may then be listed or quoted, and (ii) the completion and
effectiveness of such registration or other qualification of such Shares under
state or federal law, rule or regulation, as the Committee shall determine to be
necessary or advisable.
9. TAX WITHHOLDING
The Company shall have the right to withhold from amounts due
Participants, or to collect from Participants directly, the amount which the
Company deems necessary to satisfy any taxes required by law to be withheld at
any time by reason or participation in the Plan, and the obligations of the
Company under the Plan shall be conditional on payment of such taxes. The
Participant may, prior to the due date of any taxes, pay such amounts to the
Company, in cash, or with the consent of the Committee, in Shares (which shall
be valued at their Fair Market Value on the date of payment); provided however,
that not notwithstanding the foregoing, in the case of a Reporting Person, no
election to use Shares for the payment of withholding taxes shall be effective
unless made in compliance with any applicable requirements of Rule 16b-3 under
the Exchange Act. There is no obligation under this Plan that any Participant be
advised of the existence of the tax or the amount required to be withheld.
Without limiting the generality of the foregoing, in any case where it
determines that a tax is or will be required to be withheld in connection with
the issuance or transfer of Shares under this Plan, the Company may, pursuant to
such rules as a Committee may establish, reduce the number of such Shares so
issued or transferred by such number of Shares as the Company may deem
appropriate, in its sole discretion, to accomplish such withholding, or make
such other arrangements as it deems satisfactory. Notwithstanding any other
provisions of this Plan, the Committee may impose such conditions on the payment
of any withholding olbigation as may be required to satisfy applicable
regulatory requirements including, without limitation, Rule 16b-3 (or any
successor provision) promulgated by the Securities and Exchange Commission.
The Company makes no representation or warranty to the Participants,
their successors and/or assigns, regarding the possible tax treatment or effect
to be given to the transaction and events contemplated by an Award and the Plan,
including, but not limited to, registration of an Award, Option(s) and/or
transfers of stock certificates, and the Company hereby advises and directs the
Participants to seek their own individual counsel and advice concerning these
matters. The Participants agree that they will not rely upon the advice of any
person or persons associated with the Company, including, but not limited to;
possible adverse tax consequences of this transaction, Option(s) the Plan, or
the exercise of any Option(s); and will
-10-
waive any claim, that the Participants, or their successors and assigns, may
have against the Company, and will agree to hold harmless, and will indemnify
the Company against any such claim(s) and/or liability.
10. ADMINISTRATION OF THE PLAN
(a) The Committee. Except as otherwise provided by the Board, the Plan
shall be administered by the Committee, which shall be comprised of two or more
members of the Board of Directors, each of whom shall be a "disinterested
person" as defined in Rule 16b-3 (or successor provision) promulgated by the
Securities and Exchange Commission. In the absence of specific designation by
the Board of Directors, the Committee shall consist of those members of the
Board of Directors who, from time to time, shall be "disinterested persons" as
so defined.
(b) Committee Action. A majority of the members of the Committee at the
time in office, shall constitute a quorum for the transaction of business and
any determination or action may be taken at the meeting of a majority vote or
may be taken without a meeting by a written resolution signed by all members of
the Committee. All decisions and determinations of the Committee shall be final,
conclusive and binding upon all Participants and upon all persons claiming any
rights under the Plan with respect to any Options. Members of the Board of
Directors and members of the Committee acting under the Plan shall be fully
protected in relying in good faith upon the advice of counsel and shall incur no
liability except for willful misconduct in the performance of their duties.
(c) Committee Authority. In amplification of the Committee's power
and duties, but not by way of limitation, the Committee shall have full
authority and power to:
(i) construe and interpret the provisions of the Plan and
make rules and regulations for the administration of
the Plan not incinsistent with the Plan;
(ii) decide all questions of eligibility for Plan
participation and for the grant of Awards;
(iii) adopt forms of Awards and other documents consistent
with the Plan;
(iv) engage agents to perform legal, accounting and other
such professional services as it may deem proper for
administering the Plan; and
(v) take such other actions as may be reasonable,
required or appropriate to administer the Plan or to
carry out the Committee activities contemplated by
other sections of this Plan.
-11-
(d) Indemnification. In addition to such other rights of
indemnifications as they may have as directors or as members of the Committee,
the Board of Directors and the members of the Committee shall be indemnified by
the Company against the reasonable expenses, including court costs and
reasonable attorney's fees actually incurred in connection with the defense of
any action, suit or proceeding, or in connection with any appeal therein, to
which they or any of them may be a party by reason of any action taken or
failure to act under or in connection with the Plan or any Award granted
hereunder, and against all amounts paid by them in settlement thereof, or paid
by them in satisfaction of a judgment in any such action, suit or proceeding,
except where such indemnification is expressly prohibited by applicable law.
11. EFFECTIVE DATE
The effective date of the Original Plan shall be September 1, 1992 (the
date it was approved by the Board of Directors). The Effective Date of the
Storage Computer Corporation Amended and Restated Plan shall be October 24, 1994
(the date it was approved by the Board of Directors, subsequently ratified by
the shareholders' approval of the Plan). The effective date of this second
Amended and Restated Plan, shall be February 23, 1995, and shall be subject to
shareholder approval within twelve months of the effective date. If the proposal
is not subsequently approved by the shareholders within twelve months of the
effective date, the Storage Computer Corporation Amended and Restated Plan, as
previously adopted, will remain in full force and effect. Nothing contained in
this Plan shall be deemed to limit or adversely amend or modify the terms of, or
rights of Participants under, Options granted prior to the Effective Date in an
manner which derogates from or otherwise diminishes the terms of, or rights
under, such Options.
12. AMENDMENT AND TERMINATION
(a) The Plan. (i) Amendment. The Board of Directors may amend the Plan
from time to time in its sole discretion; provided however, that no such
amendment shall, without the approval of the shareholders of the Company in
accordance with the laws of the State of Delaware, Section 422 of the Code and
Rule16b-3 under the Exchange Act: (A) change the class of persons eligible to
receive Awards or otherwise materially modify the requirement as to eligibility
for participation in the Plan; (B) increase the aggregate number of Shares with
respect to which Awards may be made under the Plan; (C) materially increase the
benefits accruing the Participants under the Plan; or (D) remove the
administration of the Plan from the Committee or render any member of the
Committee eligible to receive an Award under the Plan while serving thereon. Any
purported amendment in violation of these restrictions shall be void and of no
effect. Furthermore, no amendment shall impair the rights of any Participant
under any Award theretofore made under the Plan, without the Participant's
consent.
(ii) Termination. The Board of Directors may suspend or
terminate the Plan at any time. Upon termination of
the Plan, no additional Awards shall be granted under
the Plan; provided however, that the terms of the
Plan shall continue in full force and effect with
respect to outstanding and unexercised Options
granted under the Plan and Shares issued under the
Plan.
(b) Awards. Subject to the terms and conditions and the limitations of
the Plan, the Committee may, in the exercise of its sole discretion, modify,
extend or renew the terms of outstanding Awards granted under the Plan, or
accept the surrender of outstanding Awards (to the extent not theretofore
exercised). Without limitng the generality of the foregoing, the Committee may
in its discretion at any time accelerate the time in which any Option is
exercisable, subject to compliance with the requirements of Rule 16b-3 (or
successor provision) promulgated by the Securities and Exchange Commission.
Notwithstanding the foregoing, however, no modifications of an Award shall,
without the consent of the Participant, impair any rights or obligations under
any Awards theretofore granted under the Plan.
13. MISCELLANEOUS
(a) Employment. Neither the establishment of the Plan nor any
amendments thereto, nor the granting of any Award under the Plan, shall be
construed as in any way modifying or affecting or evidencing any intention or
understanding with respect to, the terms of the employment of or service of any
Participant with, or the nomination of any Participant to stand for election as
a director, by the Company. No person shall have a right to be granted Awards or
having been selected as a Participant for one Award, to be so selected again.
(b) Multiple Awards. Subject to the terms and restrictions set forth
in the Plan, a Participant may hold more than one Award.
(c) Written Notice. As used herein, any notices required hereunder
shall be in writing and shall be given in the forms, if any, provided or
specified by the Committee. Written notice shall be effective upon actual
receipt by the person to whom such notice is to be given, provided however, that
in the case of notices to Participants and their heirs, legatees, and legal
representatives, notice shall be effective upon delivery, if delivered
personally or three business days after mailing, registered first class postage
prepaid to the last known address to whom notice is given. Written notice shall
be given to the Committee and the Company at the following address, or such
other address as may be specified from time to time.
Storage Computer Corporation
11 Riverside Street
Nashua, New Hampshire 03062
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Attn: Compensation Committee
(d) Applicable Law; Severability. The Plan shall be governed by and
construed in all respect in accordance with the laws of the State of Delaware.
If any provisions of the Plan shall be held by a court of competent jurisdiction
to be invalid or unenforceable, the remaining provisions hereof shall continue
to be fully effective.
(e) Compliance with SEC Regulations. It is the Company's intent that
the Plan comply in all respects with Rule 16b-3 under the Exchange Act and any
successor rule pursuant thereto. If any provision of this Plan is later found
not to be in compliance with Rule 16b-3, the provision shall be deemed void. All
Option grants to, and all exercises of Options by, Participants and Reporting
Persons under this Plan, shall be executed in accordance with the requirements
of Section 16 of the Exchange Act.
(f) Participant Warranty. The Participant represents and warrants to
the Company, its successors and assigns, the Committee and all other interested
persons, that he/she is of full age and that any stock purchased by him/her
hereunder, and his/her successors and/or assigns, under any Option(s), is to be,
and is being purchased for investment and not with a view to the distribution
thereof.
-14-
PROMISSORY NOTE
---------------
$710,000 Nashua, New Hampshire
December 31, 1996
FOR VALUE RECEIVED, the Undersigned promises to pay to the order of
Theodore J. Goodlander (hereinafter the "Holder"), the principal sum of Seven
hundred and ten thousand dollars, with interest therein, at the rate of the
Prime Rate of interest per annum then in effect at Citibank, N.A., plus one
percent (1%), per annum, upon the unpaid balance thereof to be paid, payable as
follows:
a) Interest shall be due and payable monthly.
b) Principal and any accumulated interest shall be due and payable
on January 31, 1998.
c) Interest on any accrued but unpaid amounts, which remain unpaid
as of their due dates, shall accrue interest at the penalty rate
of one percent (1%) per month, on any unpaid portion thereof,
until paid.
In the event the Undersigned, (i) defaults in the payments of principal
or of interest on this Note, or (ii) makes an assignment for the benefit of
creditors, files a petition in bankruptcy, is adjudicated insolvent or bankrupt,
petitions or applies to any tribunal for any receiver of any trustee of, of for
the undersigned, commences any proceeding relating to the Undersigned, under any
reorganization, agreement, readjustment of debt, dissolution or liquidation law
or statute of any jurisdiction, whether now or hereafter in effect, or there is
commenced against the Undersigned, any such proceeding which remains undismissed
for a period of thirty (30) days, or any order approving the petition in any
such proceedings is entered, or the Undersigned by any act indicates its consent
to, approval of or acquiescence in any such proceedings, or the appointment of
any receiver of, or trustee for the Undersigned, or suffers any such
receivership or trusteeship to continue undischarged for a period of thirty (30)
days, then at the option of the Holder, this Note shall become immediately due
and payable without notice or demand.
The Undersigned shall be entitled to pre-pay any part or all of the
balance remaining sums due hereunder, at any time. Payment hereunder shall be
delivered to the Holder hereof at Nashua, New Hampshire, or such other place as
the Holder hereof may direct, and shall be deemed paid when due, if post-marked
on or before the due date. No delay on the Holder hereto in exercising any right
hereunder shall operate as a waiver of such right or any other right under this
Note. If collection of this Note is required to be made through an attorney, the
Undersigned agrees to pay the costs of collection, including reasonable
attorneys' fees.
WITNESS UNDERSIGNED:
/s/ Norunn Heilevang /s/ Theodore J. Goodlander
- ------------------------------ ------------------------------
Theodore J. Goodlander, President
Storage Computer Corporation
FIRST AMENDMENT TO
LOAN AGREEMENT
BETWEEN
STATE STREET BANK AND TRUST COMPANY
AND
STORAGE COMPUTER CORPORATION
AUGUST 20, 1996
FIRST AMENDMENT TO LOAN AGREEMENT
THIS FIRST AMENDMENT (this "Amendment") is made and entered into as of
August 20, 1996 by and between STATE STREET BANK AND TRUST COMPANY, a
Massachusetts trust company having its principal place of business at 225
Franklin Street, Boston, Massachusetts 02110-2804 (the "Bank") and STORAGE
COMPUTER CORPORATION, a Delaware corporation having its principal place of
business at 11 Riverside Street, Nashua, New Hampshire 03032 (the "Borrower").
W I T N E S S E T H:
WHEREAS, the Bank and the Borrower are parties to a Loan Agreement
dated as of August 4, 1995 (the "Original Loan Agreement"), pursuant to which
the Bank has established a line of credit for the Borrower, on the terms and
conditions set forth therein, in the maximum principal amount of Six Million
Dollars ($6,000,000) (the "Original Line of Credit"); and
WHEREAS, the Original Line of Credit is evidenced by the Borrower's
Line of Credit Note dated August 4, 1995 in the maximum principal amount of
$6,000,000 (the "Original Note"); and
WHEREAS, the Borrower has requested that the Bank (i) increase the Line
of Credit from $6,000,000 to $10,000,000, (ii) make letter of credit borrowings
available thereunder, and (iii) to make certain other amendments to the Original
Loan Agreement as hereinafter set forth; and
WHEREAS, the Bank is willing to accommodate the Borrower's requests on
the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual promises contained in
this Amendment, and intending to be legally bound hereby, the parties hereto
hereby agree as follows:
1. Capitalized terms not otherwise defined herein shall have the
meanings ascribed to them in the Original Loan Agreement or the Affiliate
Subordination Agreement, as the context so requires.
2. The following respective definitions in Section 1.01 of the
Original Loan Agreement are hereby replaced in their entirety with the
following:
"Line of Credit" shall mean the line of credit made available to
the Borrower under this Agreement in the maximum principal amount of
Ten Million Dollars ($10,000,000).
"Maximum Line Availability" shall mean Ten Million Dollars
($10,000,000).
"Note" shall mean the unsecured Amended and Restated Line of Credit
Note dated the Closing Date (as amended and restated as of August 20,
1996) in the maximum
principal amount of Ten Million Dollars ($10,000,000) issued by the
Borrower to the Bank in the form of Exhibit A annexed hereto, and all
extensions, renewals, modifications, substitutions, restatements,
replacements and amendments thereof.
"Review Date" shall mean May 31, 1997, the date upon which the
Line of Credit shall be due and payable in full, unless the payment
thereof is earlier made, whether upon demand, prepayment or otherwise,
or unless such date is extended in writing by the Bank in its sole
discretion."
4. There is hereby added the following provision as new Section 2.11 to
the Loan Agreement:
"2.11. LETTERS OF CREDIT; REDUCTION OF AVAILABILITY UNDER THE LINE OF
CREDIT.
(a) STANDBY LETTERS OF CREDIT. If requested by the Borrower prior to
the earlier of demand or the Review Date, the Bank will issue one or more
standby letters of credit, for the purpose of providing credit support for a
Taiwanese supplier relationship, pursuant to one or more of the Bank's standard
standby letter of credit agreements, for the account of the Borrower, in amounts
in the aggregate not to exceed the lesser of (i) Two Million Dollars
($2,000,000), or (ii) the unused availability under the Maximum Line
Availability.
(b) REDUCTION OF MAXIMUM LINE AVAILABILITY. The face amount of the
letters of credit in the aggregate shall reduce the Maximum Line Availability on
a dollar for dollar basis.
(c) EXPIRATION DATES. All such letters of credit shall expire within
one year of their issuance.
(d) LOANS. All amounts paid out under such letters of credit shall be
deemed to be Loans, evidenced by the Note.
(e) FEES. In addition to all other fees and charges payable hereunder
and under the Note, the Borrower shall pay to the Bank (i) concurrently with the
issuance of each letter of credit, the Bank's standard issuance and transmittal
fees, and (ii) while any letter of credit is outstanding for the account of the
Borrower, a fee of one and one-half percent (12%) per annum on the face amount
of outstanding letters of credit, calculated on the basis of a year of 360 days
counting the actual number of days elapsed, shall be payable annually in
advance."
5. Section 7.02 of the Loan Agreement is hereby amended as follows:
"7.02. QUICK RATIO. A Quick Ratio greater than or equal to 1.25:1.00."
6. The Original Note and Exhibit A to the Loan Agreement are hereby
amended in their entirety to read as set forth in Attachment I to this
Amendment. In order to evidence such changes in the Original Note, the Borrower
shall issue to the Bank on the date hereof a new note
-3-
(the "Replacement Note") in the form of Attachment I annexed hereto in
replacement and substitution of the Original Note. The Replacement Note shall
not constitute a satisfaction or a novation of the Original Note, but merely a
replacement thereof.
7. To induce the Bank to enter into this Amendment, the Borrower hereby
represents and warrants that on the date hereof, there exists neither an "Event
of Default" under the Original Loan Agreement, the Original Note or the
Affiliate Subordination Agreement (or under any other agreement or document
executed in connection with the foregoing), nor any event which would constitute
such an Event of Default but for the passage of time, or for the giving of
notice, or both. The Borrower hereby restates and reaffirms as of the date
hereof all of the representations and warranties set forth in Article III of the
Loan Agreement, as amended by this Amendment, except that for the purposes of
such restated representations and warranties, all references hereto to the
"Agreement" shall be deemed to refer to the Original Loan Agreement as amended
hereby, and the use of "hereunder", "herein", and words of similar import shall
be deemed to refer to the Original Loan Agreement, as amended hereby, and all
references to the Original Note shall be deemed to refer to the Replacement
Note. All covenants and agreements of the Borrower contained in Articles V, VI
and VII of the Loan Agreement and all Events of Default and remedies contained
in Article VIII of the Loan Agreement, except as may be amended hereby, are
hereby incorporated in this Amendment by reference as though specifically set
forth herein.
8. The Borrower hereby confirms and agrees that each and every
reference to the "Agreement" or the "Loan Agreement" in the Loan Agreement and
the Exhibits thereto and in any other loan document executed in connection
therewith shall hereinafter be deemed to refer to the Original Loan Agreement as
amended hereby.
9. The Borrower hereby confirms and agrees that each and every
reference to the "Note" or the "Line of Credit Note" in the Loan Agreement and
the Exhibits thereto and in any other loan document executed in connection
therewith shall hereinafter be deemed to refer to the Replacement Note in its
new principal amount.
10. In addition to the conditions set forth in Article IV of the Loan
Agreement, the Bank's obligation to enter into this Amendment is subject to the
following conditions:
(i) the Borrower shall have delivered to the Bank the following:
(1) the Replacement Note, an Agreement of Consent, Amendment
and Confirmation of Security Documents between the Bank and
the Borrower, and such other agreements, documents,
certificates, resolutions, schedules and/or exhibits as may be
necessary or desirable to further the purposes of this
Amendment;
(2) any and all amendments to Certificate of Incorporation, if
any, since the execution of the Original Loan Agreement, to
the extent not previously delivered to the Bank, certified by
the Secretary of the State of the Borrower's incorporation;
-4-
(3) a certificate of the Secretary of the Borrower certifying
as to: (a) the incumbency and signature of its officers; (b)
adoption of resolutions of its Board of Directors authorizing
the execution, delivery and performance of this Amendment, the
Replacement Note and of all other instruments, agreements,
documents or certificates contemplated by the Amendment; and
(c) the accuracy and completeness of its charter documents and
by-laws as previously delivered to the Bank or as amended; and
(4) such other supporting agreements, certificates and
documents as the Bank may reasonably request.
(ii) the Bank shall have received an opinion of counsel to the Borrower
to the effect that (a) the execution, delivery and performance by the Borrower
of this Amendment, the Replacement Note and any other agreement executed in
connection herewith, have been duly authorized by all requisite corporate action
of the Borrower and constitutes the legal, valid and binding obligations of the
Borrower, enforceable in accordance with their terms, and (b) such other matters
as the Bank may reasonably request.
11. The execution, delivery and performance of this Amendment and the
Replacement Note by the Borrower have been duly authorized by all requisite
corporate action, are legal, valid and binding on the Borrower, and will not
violate any provision of law, any order, judgment or decree of any court or
other agency of government, or the organizational documents of the Borrower or
any instrument to which the Borrower is a party or by which the Borrower is
bound.
12. The Borrower will pay all out-of-pocket expenses, cost and charges
incurred by the Bank (including reasonable fees and disbursements of counsel) in
connection with the preparation and implementation of this Amendment and the
transactions contemplated hereby and the documents and instruments to be
delivered pursuant hereto.
13. Except as specifically amended hereby, the Original Loan Agreement
and Replacement Note and all instruments and documents executed in connection
therewith, shall remain in full force and effect, and are hereby ratified and
affirmed in all respects.
[Intentionally left blank]
-5-
IN WITNESS WHEREOF, the Borrower and the Bank have caused this
Amendment to be duly executed as a sealed instrument by their duly authorized
representatives, all as of the day and year first above written.
STATE STREET BANK AND TRUST COMPANY
By: /s/ L. Dan Lobdell
------------------------------
L. Dan Lobdell
Vice President
ATTEST: STORAGE COMPUTER CORPORATION
/s/ Thomas A. Wooters By: /s/ Theodore Goodlander
- ---------------------- ------------------------------
Secretary Theodore Goodlander
Chief Executive Officer
-6-
EXHIBIT 10.7
AGREEMENT OF CONSENT, AMENDMENT
AND CONFIRMATION
THIS AGREEMENT (this "Agreement") is made and entered into as of this
20th day of August, 1996 by and among STORAGE COMPUTER CORPORATION, a Delaware
corporation having its principal place of business at 11 Riverside Street,
Nashua, New Hampshire 03032 (the "Borrower"), THEODORE J. GOODLANDER, an
individual residing at 4 Victoria Drive, Nashua, New Hampshire 03063
("Goodlander") and STATE STREET BANK AND TRUST COMPANY, a Massachusetts trust
company having its principal place of business at 225 Franklin Street, Boston,
Massachusetts 02110-2804 (the "Bank").
W I T N E S S E T H T H A T:
WHEREAS, the Borrower and the Bank are parties to a Loan Agreement
dated as of August 4, 1995 (the "Original Loan Agreement"), pursuant to which
the Bank established a line of credit for the Borrower in the maximum principal
amount of $6,000,000, which line of credit is evidenced by the Borrower's Line
of Credit Note issued on such date in such maximum principal amount (the
"Original Line of Credit Note"); and
WHEREAS, in connection with the execution and delivery of the Original
Loan Agreement and the Original Note, (a) the Bank, the Borrower and Goodlander
entered into an Affiliate Subordination Agreement (the "Subordination
Agreement"); and
WHEREAS, concurrently herewith, the Borrower and the Bank are entering
into a First Amendment to Loan Agreement of even date herewith ("Amendment"),
pursuant to which the Bank has agreed, among other things, to increase the line
of credit loan from $6,000,000 to $10,000,000 (the "New Obligations"); and
WHEREAS, pursuant to the Original Loan Agreement, as amended by the
Amendment (as so amended, hereinafter, the "Amended Loan Agreement"),
concurrently herewith the Borrower are executing and delivering to the Bank its
Amended and Restated Line of Credit Note dated August 4, 1995 (as amended and
restated as of the date hereof) in the maximum principal amount of $10,000,000
(the "Amended Note"); and
WHEREAS, the parties hereto are entering into this Agreement to amend
the Subordination Agreement consistent with the amendments effected by the
Amendment.
NOW, THEREFORE, for value received, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto hereby agree as follows:
1. Capitalized terms not otherwise defined herein shall have the
meanings ascribed to them in the Amended Loan Agreement, or in the Subordination
Agreement, as the context so requires.
2. To the extent required, Goodlander hereby consents to the execution,
delivery and performance by the parties thereto of the Amended Loan Agreement
and the Amended Note.
3. Each of the Borrower and Goodlander hereby confirms and agrees that
the New Obligations shall constitute "Loans", "Obligations", "Senior
Indebtedness" or "Senior Debt", as the case may be, for all purposes of the
Subordination Agreement and, howsoever defined, the New Obligations shall
continue to be entitled to all of the benefits of the Subordination Agreement.
4. Each of the Borrower and Goodlander hereby further represents and
warrants that the Exhibit to the Subordination Agreement is true and correct on
and as of the date hereof, and Goodlander hereby restates and reaffirms all of
the representations and warranties made by him therein.
5. Each of the Borrower and Goodlander hereby confirms and agrees that
each and every reference to the "Agreement" or the "Loan Agreement" in the
Original Loan Agreement, the Subordination Agreement and any other loan document
executed in connection therewith and in any Exhibit delivered pursuant thereto
shall hereinafter be deemed to refer to the Original Loan Agreement as amended
by the Amendment and hereby.
6. Each of the Borrower and Goodlander hereby confirms and agrees that
each and every reference to the "Note" or the "Line of Credit Note" in the
Original Loan Agreement, the Subordination Agreement and any other loan document
executed in connection therewith shall hereinafter be deemed to refer to the
Amended Note in its new principal amount.
7. Each of the Borrower and Goodlander shall, from time to time
hereafter, at its or his own expense, execute, deliver, file and record (in such
manner and form as the Bank may reasonably require), or permit the Bank to file
and record, any financing statements, any carbon, photographic, computer
generated or other reproduction of a financing statement, any specific
assignments or other paper that may be reasonably necessary or desirable, or
that the Bank may reasonably request, in order to maintain, preserve, perfect or
validate the Subordination Agreement or to enable the Bank to exercise and
enforce its rights thereunder or under the Amended Loan Agreement. Each of the
Borrower and Goodlander hereby appoints the Bank as its or their
attorney-in-fact to execute in its or their name or on its or their behalf such
additional financing statements or related notices as the Bank may reasonably
require, which power is coupled with an interest and is therefore irrevocable.
8. Except as specifically amended hereby, the Subordination Agreement
and all other documents and instruments securing, guaranteeing, or assuming
obligations under the Original Loan Agreement, the Original Note and all
indebtedness incurred pursuant thereto, shall remain in full force and effect,
and are hereby ratified and affirmed in all respects.
2
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as an instrument under seal all as of the day and year first above
written.
ATTEST: STORAGE COMPUTER CORPORATION
/s/ Thomas A. Wooters By: /s/ Theodore J. Goodlander
- ----------------------- ---------------------------
Secretary Theodore J. Goodlander
Chief Executive Officer
WITNESS:
/s/ Christopher P. Torregrossa /s/ Theodore J. Goodlander
- ------------------------------- ------------------------------
Theodore J. Goodlander
STATE STREET BANK AND TRUST COMPANY
By: /s/ L. Dan Lobdell
-------------------------------
L. Dan Lobdell
Vice President
3
Exhibit 21
List of Subsidiaries
--------------------
Storage Computer GmbH
Am Hohenstein 3-5
65779 Kelkheim/Fischbach Germany
Storage Computer UK Ltd.
Cleeve Road
Leatherhead, Surrey, England KT22 7NB
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
No. 333-4145 of Storage Computer Corporation (the "Company") on Form S-3 of our
report dated January 31, 1997 on the consolidated financial statements of the
Company as at December 31, 1996 and December 31, 1995 and for each of the years
in the three-year period ended December 31, 1996 appearing in this annual report
on Form 10-KSB of the Company.
Richard A. Eisner & Company, LLP
New York, New York
March 31, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,852,762
<SECURITIES> 0
<RECEIVABLES> 9,030,955
<ALLOWANCES> 0
<INVENTORY> 6,274,244
<CURRENT-ASSETS> 17,661,757
<PP&E> 2,235,167
<DEPRECIATION> 1,155,165
<TOTAL-ASSETS> 20,935,309
<CURRENT-LIABILITIES> 6,279,683
<BONDS> 742,672
0
0
<COMMON> 10,701
<OTHER-SE> 13,902,253
<TOTAL-LIABILITY-AND-EQUITY> 20,935,309
<SALES> 31,011,429
<TOTAL-REVENUES> 31,011,429
<CGS> 15,684,520
<TOTAL-COSTS> 10,089,466
<OTHER-EXPENSES> 92,523
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 209,495
<INCOME-PRETAX> 5,502,531
<INCOME-TAX> 440,980
<INCOME-CONTINUING> 5,502,531
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,061,551
<EPS-PRIMARY> .43
<EPS-DILUTED> 0
</TABLE>
Exhibit 99
CAUTION CONCERNING FORWARD-LOOKING STATEMENTS
Statements that are not statements of historical fact are
"forward-looking statements." Forward-looking statements made by or on behalf of
the Company represent the Company's reasonable judgement on the future and are
based on a number of assumptions and are subject to a number of risks and
uncertainties. Actual results may differ materially from those projected in the
forward-looking statements. Such risks and uncertainties include among other
things:
Risks of Expansion. The Company believes that in order to 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. In particular, in order to
successfully expand international sales in fiscal 1997 and subsequent periods,
the Company must continue to expand foreign operations, hire additional
personnel and recruit additional international distributors and resellers. This
will require significant management attention and financial resources and could
materially adversely affect the Company's business, operating results and
financial condition. 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.
Foreign Sales. Approximately, 53% , 61% and 53% of SCC's revenues during its
fiscal years ended December 31, 1994, 1995 and 1996, 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.
Foreign sales are subject to certain inherent risks, including unexpected
changes in regulatory and other legal requirements, tariffs and other trade
barriers, possibility of increased difficulty in collection of accounts
receivable and potentially adverse tax consequences. Currency translation 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 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 enhancing its existing
products. There can be no assurance that the Company will be successful in
developing and marketing new products that respond to technological changes or
evolving industry standards, that the Company will not experience difficulties
that could delay or prevent the successful development, introduction and
marketing of new products, or that its new products will adequately meet the
requirements of the marketplace and achieve market acceptance. If the Company is
unable, for technological or other reasons, to develop and introduce new
products in a timely manner in response to changing market conditions or
customer requirements, the Company's business will be materially adversely
affected. 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.
Products like those offered by the Company may contain undetected
software errors or failures when first introduced or as new versions are
released. There can be no assurance that, despite testing by the Company and by
current and potential customers, errors will not be found in new products after
commencement of commercial shipments, resulting in loss of or delay in market
acceptance, which could have a material adverse effect upon the Company's
business, operating results and financial condition.
Competition and Pricing. The information storage market is extremely
competitive. Companies such as Data General Corporation, Digital Equipment
Corporation, EMC Corporation, IBM Corporation,, Hewlett-Packard, 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, there can be no
assurance that the Company will be able to compete successfully against existing
companies or future entrants to the marketplace. While the Company believes that
the price-performance characteristics of its products are currently competitive,
increased competition is likely to result in price reductions, reduced gross
margin and loss of market share, any of which could materially adversely affect
the Company's business, operating results and financial condition. Many of the
Company's current and potential competitors have significantly greater
financial, technical, marketing and other resources than the Company. As a
result, they may be able to respond more quickly to new or emerging technologies
and changes in customer requirements, or to devote greater resources to the
development, promotion, sale and support of their products than the company. In
addition, current and potential competitors have established or may establish
cooperative relationships among themselves or with third parties. Accordingly,
it is possible that new competitors or alliances among competitors may emerge
and rapidly acquire significant market share. Furthermore, reductions in the
price of competitive products, changes in discount levels or announcements by
the Company's competitors, or new generations of high-performance systems may
adversely affect sales of the Company's products.
Dependence on Proprietary Technology. The Company's success depends
significantly upon its proprietary technology. The Company currently relies on a
combination of patent, copyright and trademark laws, trade secrets,
confidentiality procedures and contractual provisions to protect its proprietary
rights. The Company currently has been issued certain patents and has other U.S.
patent applications pending and numerous corresponding international patent
applications pending. There can be no assurance that the pending applications
will be approved, or that if issued, such patents, as well as patents previously
issued, will not be challenged, and if such challenges are brought, that such
patents will not be invalidated. There can be no assurance that the Company will
develop proprietary products or technologies that are patentable, that any
issued patent will provide the Company with any competitive advantages or will
not be challenged by third parties, or that the patents of others will not have
a material adverse effect on the Company's ability to do business. Despite the
Company's efforts to protect its proprietary rights, unauthorized parties may
attempt to copy aspects of the Company's products or to obtain and use
information that the Company regards as proprietary. In addition, the laws of
some foreign countries do not protect proprietary rights to as great an extent
as do the laws of the United States. There can be no assurance that the
Company's means of protecting its proprietary rights will be adequate or that
the Company's competitors will not independently develop similar technology,
duplicate the Company's products or design around patents issued to the Company
or other intellectual property rights of the Company.
Dependence on High Quality Components. 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. This risk is
particularly significant with respect to suppliers of disk drives because in
order to meet product performance requirements, the Company must obtain disk
drives with high quality and capacity. In addition, there is currently a
significant market demand for disk drives and semiconductor memory components,
which could result in component shortages, selective supply allocations and
increased prices of such components. 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.
Dependence on Key Personnel. The Company's future performance also
depends in significant part upon the continued service of its key technical and
senior management personnel. The loss of services of one or more of the
Company's officers or other key employees could have a material adverse effect
on the Company's business, operating results and financial condition. The
Company's future success also depends on its continuing ability to attract and
retain highly qualified technical and management personnel. Competition for such
personnel is intense, and there can be no assurance that the Company can retain
its key technical and management employees or that it can attract, assimilate or
retain other highly qualified technical and management personnel in the future.
