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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
Annual Report Pursuant to Section 13 or 15(d) of the Securities and Exchange Act
of 1934 for the fiscal year ended December 31, 1999
Commission File Number 1-13616
STORAGE COMPUTER CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 02-0450593
(State or other jurisdiction of incorporation (I.R.S. Employer
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:
COMMON STOCK $0.001 PAR VALUE AMERICAN STOCK EXCHANGE
------------------------------ -----------------------
(Title or Class)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
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
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Indicate by check mark if the disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Registrant's knowledge, in a definitive proxy or information
statement incorporated in Part III of this Form 10-K or any amendments to this
Form 10-K. _X_
The aggregate market value of the Common Stock of the Registrant held by
non-affiliates was approximately $43,750,960 at April 10, 2000.
At March 31, 2000 there were issued and outstanding 11,929,754 shares of the
Registrant's Common Stock, with a par value of $.001.
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STORAGE COMPUTER CORPORATION
Securities and Exchange Commission
Item Numbers and Description
<TABLE>
<CAPTION>
PART I PAGE
----
<S> <C>
ITEM 1 Business 3
ITEM 2 Properties 10
ITEM 3 Legal Proceedings 10
ITEM 4 Submission of Matters to a Vote of Security Holders 11
PART II
ITEM 5 Market for Registrant's Common Equity
And Related Stockholder Matters 12
ITEM 6 Selected Financial Data 13
ITEM 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
ITEM 7A Quantitative and Qualitative Disclosure About Market 22
Risk
ITEM 8 Financial Statements and Supplementary Data 23
ITEM 9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 23
PART III
ITEM 10 Directors and Executive Officers of the Registrant 24
ITEM 11 Executive Compensation 26
ITEM 12 Security Ownership of Certain Beneficial Owners
and Management 28
ITEM 13 Certain Relationships and Related Transactions 30
PART IV
ITEM 14 Exhibits, Financial Statement Schedules and reports 32
on Form 8-K
</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, such calculation has
been made solely on the basis of information, reports and notices filed by
affiliates of the Registrant under the Securities Exchange Act of 1934, as
amended. The aggregate market value of Common Stock indicated is based upon the
closing sale price of the Common Stock ($11.00) as reported by the American
Stock Exchange for trading on April 10, 2000. 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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PART I
ITEM 1. BUSINESS
THE COMPANY
Storage Computer Corporation (the "Company" or "SCC") develops and
manufactures software-driven multi-host storage solutions used to drive core
business applications. Storage Computer solves its customers' business problems
through its StorageSuite(TM) product line and patented OmniRAID(TM) and
OmniFORCE(TM) storage software. Based on an open systems, standards-based
architecture, these solutions support highly interactive applications; many
different servers accessing the same data; and multiple users accessing data
from different locations.
The Company pioneered the RAID 7(R) technology incorporated in its Virtual
Storage Architecture(TM), which forms the basis for its StorageSuite(TM) product
family. Based upon this performance-optimized architecture, the StorageSuite(TM)
family combines intelligent controller, disk drive, and memory technology with
patented memory mapping techniques and a powerful real-time operating system to
deliver high-performance and data protection across the mix of applications
found in today's open system environments.
COMPANY HISTORY
The Company's predecessor, Cab-Tek, Inc., began development of RAID
("Redundant Array of Independent 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. International Data Corporation
(IDC), a Framingham, MA research firm, predicts disk storage compound annual
growth rates of 88.1% for UNIX(R) and 133.8% for Windows NT(R) between the years
1997 and the year 2001. The U.S. Department of Commerce predicts that the data
storage market will grow to $1 trillion by the year 2004. Based on the market
estimates of IDC, the Company believes the market space for its products is in
the range of $6 billion to $10 billion annually.
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RAID TECHNOLOGY
The Company's product line is based on RAID storage technology. RAID
technology 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 capacities at a relatively lower cost than embedded storage solutions.
VIRTUAL STORAGE ARCHITECTURE
Storage Computer's unique Virtual Storage Architecture(TM) (VSA) forms the
basis for all its StorageSuite(TM) product families. VSA views the storage area
as a whole, coherent and extendible space, a "storage fabric," which can be
allocated to multiple hosts concurrently.
The intelligent storage management system controls the interaction between
the attached host processors and the physical drives. It tracks the location of
every piece of information and allows the host to access that data. Employing
dedicated independent I/O channels for each disk drive, the system transfers
data to the hosts 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. By controlling data flow, the system reduces or eliminates the processing
bottlenecks inherent in many other storage implementations.
THE STORAGESUITE(TM) PRODUCT FAMILY
SERIES:70 DESKTOP STORAGE SERVER:
Provides flexible high performance storage for departmental workgroups and
server clusters. An intelligent storage solution for applications with smaller
storage requirements, the DESKTOP STORAGE SERVER scales to 218 GB and supports
up to two external channels for host connections.
SERIES:71 STORAGE SERVER:
Provides high performance storage for large departmental workgroups and server
clusters. An intelligent storage solution for users with medium-to-large storage
capacity requirements, the STORAGE SERVER scales up to 1 TB+ and supports up to
four external channels for host connections.
SERIES:72 OMNIRAID(TM) SERVER:
Enables widely diverse applications to share centrally managed storage with
optimal performance, data protection, efficiency, and flexibility. OMNIRAID
SERVERS enable multiple data protection levels to be set at the logical
transaction or data set level, independent of the physical array topology. Ideal
for regional operating divisions, large workgroups, or medium-sized enterprises,
the OMNIRAID SERVERS scales up to 2 TB+ and supports up to 12 external channels
for host connections.
SERIES:73 OMNIRAID SUPERSERVER(TM):
Provides enterprise-class storage services enabling widely diverse applications
across an enterprise to share centrally managed storage with optimal
performance, data protection, efficiency, and flexibility. The highest
performing storage server in the industry, the OMNIRAID SUPERSERVER delivers
even higher read and write performance than the OMNIRAID STORAGE SERVER. Ideal
for both high-performance commercial applications and very high bandwidth
applications, the OMNIRAID SUPERSERVER supports storage environments to 2 TB+
and 12 external channels for host connections.
SERIES:74 OMNIRAID SUPERSERVER/ES:
At the top end of the highest performing storage servers in the industry, the
OMNIRAID SUPERSERVER/ES delivers even higher read and write performance than the
OMNIRAID SERVER. Ideal for very high bandwidth applications, the OMNIRAID
SUPERSERVER/ES supports clustered storage environments up to 16 TB and 48
external channels for host connections.
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DISASTER RECOVERY AND BUSINESS CONTINUANCE PRODUCTS
OMNIFORCE is an advanced intelligent software product that runs on the
SERIES:73 and 74 OMNIRAID SUPERSERVER/ES. It provides an online data protection
facility to allow 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 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
provides fully user-scalable protection at the file level, rather than the array
level. Six levels of mirroring are supported: intramirroring, local, cross,
remote, replicated, and reflective.
The Company entered into OEM agreements during 1998 with ATL Products and
Intelliguard Software to offer serverless backup. This combination of OMNIRAID
STORAGE SERVERS with ATL's tape library and Intelliguard's Celestra backup
software will enable the Company's OMNIRAID products to perform realtime backup,
without requiring host intervention, at speeds ranging up to one terabyte per
hour.
STORAGE MANAGEMENT
STORAGE ADMINISTRATOR(TM) 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. This advanced "Call Home" technology can simultaneously
report to local, regional, or to the Company's global corporate monitoring
center.
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, New Hampshire
and in field locations in the United States, Europe and Asia.
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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. 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.
YEAR 2000
At the turn of Year 2000, the Company experienced no material events in any
of its products externally, or in its internal business transaction systems
after 12:00 AM January 1, 2000, and anticipates no future issues as a result of
the Year 2000 problem.
Many computer systems and software products were not designed to handle any
dates beyond the year 1999. As a result, computer systems and/or software used
by many companies may have needed to be modified prior to the Year 2000 in order
to remain functional. Significant uncertainty existed in the hardware and
software industry concerning the potential effects associated with such
compliance.
In mid-1997, the Company formed an internal task force to evaluate those
areas of the Company that may have been affected by the Year 2000 problem and
devised a plan for the Company to become Year 2000 compliant in a timely manner
(the "Plan"). The Plan focused on three major areas; the Company's internal
business transaction systems; the products the Company sells and the business
transaction systems of its business partners, including suppliers, customers and
bankers. To date, the Company has completed the execution of its Plan and
anticipates no further testing on this issue.
Internal Business Transaction Systems
The Company had completed a review of its critical business transaction systems,
and its Year 2000 compliance related to business transaction systems is as
follows:
All of the Company's systems for processing business transactions prior to
and following 12:00 AM January 1, 2000. This compliance extended to the
underlying hardware, operating systems, and other software on which the
Company's business system operates. This compliance included the following
transactions and related printed documents: accepting orders from customers,
fulfilling customer orders, invoicing customers, crediting customer accounts,
applying customer payments, refunding customers, placing orders with vendors,
receiving vendor shipments, processing vendor invoices, and paying vendors.
The Company incurred no loss of function to date and no incremental material
costs associated with its efforts to become Year 2000 compliant, as the majority
of the costs which had occurred were as a result of normal upgrade procedures.
Based on current information, the Company does not expect any future costs to
modify its information technology infrastructure to be material to its financial
condition or results of operations. However, there can be not assurances that
there will not be interruptions or other limitations of financial and operating
systems functionally or that the Company will not incur significant costs to
avoid such interruptions or limitations.
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Products the Company Sells
The Company had completed a review of its manufactured product line and
third party products and software sold by Storage Computer for Year 2000
compliance. The Company's Year 2000 compliance related to the products it sells
is as follows:
All StorageSuite storage products are Y2K compliant. The Company had
completed its review and testing of all products. Current and past products are
currently Y2K compliant as will be any future product developments. Expenditures
related to this portion of the Company's Y2K plan were expensed as incurred and
are immaterial in their impact on the Company's operating results.
The Company is continuing to work with its major vendors and suppliers to
ensure that the Company's manufacturing and infrastructure systems will not
experience any difficulties as a result of their products. Any effects on the
Company's results of operations as a result of such parties' failures are not
estimable. However, management does not believe that any individual vendor's
failure to comply will have a material effect on the Company's products,
financial condition or continuing operations.
The Company's Business Partners
The Company's suppliers (particularly sole-source and long lead-time
suppliers), key customers and other key business partners (e.g. bankers)
experienced no material events or significant computer outages related to Y2K
issues at the turn of the year 2000. In the event any of the Company's
suppliers, key customers or business partners encounter any lingering, latent
Year 2000 problems in the future, such an event may have a material adverse
effect on the Company's results of operations. Management does not anticipate
any significant event from any latent Year 2000 issues which could also have a
material adverse effect on the Company.
The Company has incurred to date no incremental material costs associated
with the Year 2000 issue. Based on current information, the Company does not
expect future costs, if any, to be material to its financial condition or
results of operations. Costs incurred relating to Year 2000 issue were expensed
by the Company during the period in which they were incurred.
COMPETITION
The information storage market is extremely competitive. Companies such as
Compaq, 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 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.
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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. In October of 1998 the Company
made an additional investment in Open Storage Solutions, S.A., and acquired
majority interest. In February of 1998 the Company formed Storage Computer Pty.,
Ltd. for the purpose of sales and support in Australia.
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 for establishing relationships with
value-added resellers, who sell the Company's products to final end users. (See
the Company's financial statements included elsewhere herein for more detailed
information regarding revenues.)
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 to control
inventories.
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.
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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 StorageSuite product line 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 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
1999, 1998 and 1997 were $1,980,988, $4,258,249 and $2,851,739 respectively.
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.
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 believes that its products, trademarks 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. In the
event the Company's products are 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.
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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
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.
During 1999, the Company completed a thorough evaluation of its patents,
claims and other intellectual property rights. Upon completion of such
evaluation, management firmly believes that several of its patents have been
infringed by several manufacturers in the computer storage marketplace.
Presently, the Company is aggressively pursuing the enforcement of its
intellectual property rights secured by the patents and has retained a major law
firm, on a contingency basis, to enforce the Company's rights. The Company will
be seeking royalties for the past infringement in addition to licensing
agreements covering future production and sale of such infringing products.
EMPLOYEES
As of December 31, 1999, the Company had 62 full time employees. Of the
total, 46 were based in North America, 9 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 are 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 1999, the Company paid a monthly
rental of $18,800 to lease this facility. The current monthly rental is $18,800
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 13 - 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
During 1999, the Company settled its claims against one of its disk
drive suppliers Micropolis (USA), Inc. and its parent company, Micropolis
Singapore Ltd. As part of the settlement, the Company filed an allowed claim
against Micropolis (USA) Inc., with the Bankruptcy Court and final payment is
expected to be approximately ten percent of the claim. All settlement sums in
agreement with the bankruptcy court have either been received or are expected to
be received by June 30, 2000. Also in 1999, the claim against Micropolis
Singapore Ltd. was filed with the bankruptcy court in Singapore and payment was
received in settlement of the claim as part of that company's liquidation. The
Company does not believe that its involvement in, final settlement of,
litigation costs or settlement receipts will have any material effect on the
Company's business, operating results or financial condition.
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The Company is not involved presently in any other material legal
proceedings that the Company believes would have a material effect upon its
business, operating results or financial condition. However, the Company is
involved in various other minor legal actions in the ordinary course of its
business. While the Company currently believes that the amount of any ultimate
potential loss would not be material to the Company's financial position, the
outcome of these actions is difficult to predict. In the event of such adverse
outcome, the ultimate potential loss could have an adverse effect on the
Company's financial position or reported results of operations in a particular
quarter.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the Company's security holders
during its fourth quarter of the fiscal year ended December 31, 1999.
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PART II
ITEM 5. MARKET FOR 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, 1999 and 1998, as reported by the American Stock Exchange.
FISCAL 1999
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High Low
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First Quarter $3.50 $1.94
Second Quarter $2.38 $1.50
Third Quarter $1.88 $0.88
Fourth Quarter $5.63 $0.75
FISCAL 1998
-----------
High Low
---- ---
First Quarter $9.62 $5.50
Second Quarter $7.38 $3.63
Third Quarter $4.38 $2.44
Fourth Quarter $5.00 $1.00
On March 31, 2000, there were 330 record holders of the Company's Common
Stock. The Company believes the actual number of beneficial owners of the Common
Stock is much greater than the stated 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 cash dividends and does not anticipate paying
any cash dividends in the foreseeable future. The Company is also restricted
from paying cash dividends under the terms of its bank credit facility.
During the first quarter of the Company's fiscal year 2000, the common stock
traded at increased prices, ranging from a low closing price of $3.31, to a high
closing price of $15.88.
12
<PAGE> 13
ITEM 6. SELECTED FINANCIAL DATA
The following data, insofar as it relates to the three fiscal years 1997
through 1999 (except for the 1997 Balance Sheet Data) has been derived from the
consolidated financial statements appearing elsewhere herein, including the
Consolidated Balance Sheet as of December 31, 1999 and December 31, 1998, and
the related Consolidated Statement of Operations for each of the three years in
the period ended December 31, 1999, and notes thereto. The data, insofar as it
relates to the Balance Sheet Data as December 31, 1997, December 31, 1996 and
December 31, 1995, and the Statement of Operations Data for the fiscal years
1996 and 1995, has been derived from the historical financial statements of the
Company for such periods.
YEAR ENDED DECEMBER 31
----------------------
STATEMENT OF OPERATIONS DATA
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenue $ 10,525,658 $ 17,051,749 $ 37,146,103 $ 31,011,429 $ 23,130,413
Cost of Revenue 6,303,125 11,838,657 18,152,978 15,326,909 12,054,265
------------ ------------ ------------ ------------ ------------
Gross Profit 4,222,533 5,213,092 18,993,125 15,684,520 11,076,148
Operating Expenses
Research and development 1,980,988 4,258,249 2,851,739 2,785,280 2,116,542
Selling and marketing 4,098,347 8,871,805 7,959,521 6,117,947 5,469,238
General and Administrative 2,357,254 2,387,748 1,526,477 1,186,239 1,089,797
Write Down of Investment 0 2,094,134 0 0 0
------------ ------------ ------------ ------------ ------------
Total 8,436,589 17,611,936 12,337,737 10,089,466 8,675,577
------------ ------------ ------------ ------------ ------------
Operating Income (loss) (4,214,056) (12,398,844) 6,655,388 5,595,054 2,400,571
Other income (expense) (562,139) (636,668) (399,635) (92,523) 58,986
------------ ------------ ------------ ------------ ------------
Income (loss) before income taxes (4,776,195) (13,035,512) 6,255,753 5,502,531 2,459,557
Provision (benefit) for income taxes (199,868) (2,145,020) 2,364,000 440,980 (27,038)
------------ ------------ ------------ ------------ ------------
Net income (loss) $ (4,576,327) $(10,890,492) $ 3,891,753 $ 5,061,551 $ 2,486,595
------------ ------------ ------------ ------------ ------------
Net income (loss) per diluted share $ (.40) $ (.97) $ .33 $ .43 $ .21
BALANCE SHEET DATA
Total assets $ 14,228,668 $ 22,899,902 $ 30,811,953 $ 20,935,309 $ 14,767,614
Long term obligations $ 1,176,000 $ 710,000 $ 710,000 $ 742,672 $ 1,565,100
</TABLE>
13
<PAGE> 14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1996 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.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow
Cash flow from operations in 1999 has increased significantly as compared to
1998 and 1997. As compared to 1998, 1999 cash flow from operations increased
primarily due to a reduced net loss, an income tax refund received and a
decrease in inventories. As compared to 1997, 1999 cash flow from operations
increased primarily due to a collection on accounts receivable, the income tax
refund received and a reduction in inventories. Cash used in investing
activities was insignificant in 1999 as compared to 1998 and 1997 due to
reductions in capital expenditures and the acquisitions of other assets because
of the Company's limited working capital. Cash flow from financing activities
was positive in 1997 and 1998 because the Company increased its borrowings under
its bank credit line. In 1999, the Company reduced its balance on its line of
credit resulting in using cash for financing activities. See the Statements of
Consolidated Cash Flows included in the financial statements included elsewhere
herein for additional information.
Accounts Receivable
The reduction in accounts receivable from December 31, 1998 to December 31, 1999
of $4,436,274 was due to the reduced level of revenue during the 1999 year and
additional allowances made for doubtful accounts.
14
<PAGE> 15
Inventory
Inventory decreased $1,467,563 from December 31, 1998 to December 31, 1999.
During 1999 the Company continued programs to reduce the level of component
parts in inventory. The investment in inventory is impacted by several factors,
including, but not limited to, new product and product enhancement introduction;
the increased cost of parts associated with larger storage units; the timing of
purchased component parts such as disk drives; the non-recognition of revenue
and corresponding inventory increases due to inventory transfers deemed to be
evaluation units; and increased inventory locations throughout the United States
and Europe.
Total Assets
The Company's total assets for the fiscal years 1999, 1998, 1997, 1996 and 1995
were $14,228,668, $22,899,902, $30,811,953, $20,935,309, and $14,767,614,
respectively. Based on historically significant fluctuations for the Company's
Total Assets over the past five years, the Company's management cannot predict
whether the trend of the last three years will continue, plateau or reverse
itself.
Borrowing Arrangements
The Company has a revolving credit facility which originally expired on January
4, 2000. Previously, the Company had signed an amended loan agreement with the
bank, decreasing the commitment from a $10,300,000 secured demand line of credit
to $6,900,000, which was used for the working capital needs of the Company. The
amended loan agreement is secured by the Company's assets and requires, among
other things, maintenance of a defined minimum tangible net worth. Borrowings
against such credit facility bear interest at the bank's prime rate plus a
stipulated fee. As of December 31, 1999 the Company had drawn down $6,513,771
against the credit line. The credit line was further amended, and extended to
expire on May 5, 2000. Further, the Company also received a commitment letter
from its bank to extend the due date of up to $3,550,000 of the balance due
under its line of credit to January 2001.
Working Capital
The Company's working capital at December 31, 1999 was $545,393. In management's
opinion, the Company's current working capital position, together with
anticipated receipt of various equity investments and other financing proceeds
which the Company is seeking, and cash from operations, will be sufficient to
accommodate working capital requirements for the fiscal year ending December 31,
2000. The Company's working capital at December 31 of 1998 and 1997 was
$3,398,897 and $12,605,866, respectively. Based on historically significant
fluctuations for the Company's Working Capital over the past three years, the
Company's management cannot predict whether the trend of the last three years
will continue, plateau or reverse itself.
Equity Financing
The Company has been actively seeking equity financial investment partners and
is currently negotiating the final terms with several investors. The Company is
in receipt of several investors' offers to purchase $7,000,000 of convertible
preferred stock of the Company.
15
<PAGE> 16
RESULTS OF OPERATIONS
The following table presents the Company's consolidated statement of
operations stated as a percentage of revenue for the years ended December 31,
1999, 1998, 1997, 1996 and 1995.
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Revenue 100.00% 100.00% 100.00% 100.00% 100.00%
Product cost 59.88 69.43 48.87 49.42 52.11
------ ------ ------ ------ ------
Gross margin 40.12 30.57 51.13 50.58 47.89
------ ------ ------ ------ ------
Operating Expenses
Research and development 18.82 24.97 7.68 8.98 9.15
Selling and marketing 38.94 52.03 21.43 19.73 23.65
General and administrative 22.40 14.00 4.11 3.83 4.71
Write Down of Investment 0 12.28 0 0 0
Total 80.16 103.28 33.22 32.54 37.51
------ ------ ------ ------ ------
Operating income (loss) (40.04) (72.71) 17.91 18.04 10.38
------ ------ ------ ------ ------
Other income (loss)(expense) (5.34) (3.73) (1.08) (.30) 0.26
------ ------ ------ ------ ------
Income (loss) before income taxes (45.38) (76.44) 16.83 17.74 10.64
------ ------ ------ ------ ------
Provision for income taxes
Current tax (benefit) (1.90) (12.58) 5.44 6.00 3.76
Deferred tax (benefit) 0 0 .93 (4.58) (3.88)
Total (1.90) (12.58) 6.37 1.42 (0.12)
Net income (loss) (43.48)% (63.86)% 10.46% 16.32% 10.76%
</TABLE>
REVENUE
Revenue for the year ended December 31, 1999 was $10,525,658 reflecting a
decrease in combined product sales of $6,526,091 or 38%, compared with the year
ended December 31, 1998. Revenue for the year ended December 31, 1998 was
$17,051,749, reflecting a decrease in combined product sales of $20,094,354 or
54% compared with the year ended December 31, 1997. The decrease in revenue
resulted from a variety of causes including, but not limited to, continued
constriction in the existing customer base due to customer concern as to the
Company's financial condition, delay in the delivery of several upgrade
features, and restricted working capital conditions impeded the sales efforts
toward reestablishing the re-seller sales and marketing channel until late in
the fiscal year end.
During the year the Company undertook the following actions to facilitate
the cohesive focus towards revenue growth: appointed a new Senior Vice President
of Sales and Marketing and commenced a restructuring, including the expansion of
North America territories from three designated regions to five regions, the
initiation of the plan to re-establish the re-seller sales channel, and
consolidation of the European sales, marketing and service organizations;
implemented strategic marketing programs and product repositioning and pricing
directives with respect to the Company's existing products offering. The Company
believes these actions will provide revenue growth that will enable the Company
to return to profitability.
16
<PAGE> 17
Revenue by geographic region expressed as a percentage of total revenue is
as follows:
Year Ended Year Ended Year Ended
December 31, 1999 December 31, 1998 December 31, 1997
----------------- ----------------- -----------------
North America 44% 54% 50%
Asia 22% 22% 23%
European Sales 33% 22% 26%
Other Regions 1% 2% 1%
The shift in revenue resulted from a reduction in the U.S. direct sales
force. For the years ended December 31, 1999, 1998 and 1997, sales to one
customer were in excess of ten percent of revenue.
All United States export sales are denominated in United States dollars to
limit the amount of foreign currency risk. Export sales from the European sales
offices are denominated in United States dollars. Sales occurring through the
Company's subsidiaries located in England and Germany are conducted in the local
functional currency.
PRODUCT COST
Product cost for the years ended December 31, 1999, 1998 and 1997 was
$6,303,000, $11,839,000 and, $18,153,000, or 60%, 69% and 49%, of revenue,
respectively.
The increased product costs as a percentage of revenue in 1999 and 1998, as
compared to 1997, are attributable to various factors, including, but not
limited to, a lower dollar product margin contribution to cover non-variable
expenses associated with product production and support and increased provisions
for inventory obsolescence, based on various factors.
RESEARCH AND DEVELOPMENT
Research and development expenses for the years ended December 31, 1999,
1998 and 1997 were $1,981,000, $4,258,000, and $2,852,000, or 19%, 25% and 8% of
revenue, respectively.
In 1998 the Company had increased expenditures for research and development
in order to maintain the technology advantage for its software, and to develop
new hardware packaging. These increased expenditures resulted from the Company's
emphasis on completion of new hardware, from continued prototype and piece-part
costs, as well as payments to contractors for out-sourced design and development
costs associated with the project. In 1999, the Company decreased its
expenditures due to the decreased revenue and cash flow. The limited cash
resources limited new product development and costs were restricted to providing
continuous software upgrades and support for its existing products.
SALES AND MARKETING
Sales and marketing expenses for the years ended December 31, 1999, 1998 and
1997 were $4,098,000, $8,872,000, and $7,960,000 or 39%, 52% and 21% of revenue,
respectively. The increase in absolute dollar expenditures from 1997 to 1998 was
due to increased headcount and resulting support expense associated with the
company's expansion of the direct sales force and implementation of strategic
marketing programs introduced in the fourth quarter of 1998, and increased
allowance for bad debts. In 1999, the Company decreased its expenditures due to
the decreased revenues and a decrease in headcount.
17
<PAGE> 18
GENERAL AND ADMINISTRATIVE
General and administrative expenses for the years ended December 31, 1999,
1998 and 1997 were approximately $2,357,000, $2,388,000 and $1,526,000, or 22%,
14% and 4% of revenue, respectively. These expenses remained constant between
1998 and 1999 as the Company elected to maintain its core facilities and
personnel. In 1999, this enabled the Company to maintain its in-house
manufacturing operations and service department, which provided for the proper
level of maintenance and service required by the customer base of installed
equipment at various customer locations.
LOSS ON INVESTMENT
In August, 1998, the Company acquired, in conjunction with another investor,
ownership of a new product technology developed by a former customer ("the
developer"). The transfer of ownership was effected through a series of
transactions. During the third quarter 1997 the Company reclassified a
delinquent account receivable to a long term asset in its financial statement
and entered negotiations to secure the debt. In March 1998, the parties agreed
to convert the account receivable to convertible preferred stock. When the
developer failed to file a timely registration statement the Company surrendered
that stock and entered into new negotiations. In return for additional cash
advances made by the Company and the other investor, the ownership of the
technology was transferred. The developer was granted an exclusive license to
manufacture the new product and the purchase and sale agreement provided for
royalty payments to the purchasers. Subsequently, the developer ceased doing
business which caused the Company to terminate the license agreement. At the end
of 1998, the Company wrote down its investment on this asset to $100,000.
Additional significant resources would have been required to continue
research and development on the new product technology, and to bring it to
market. The Company did not have the additional resources to enter such business
at that time. Citing the costs, the previous write down of such asset's value to
a nominal amount and the potential for a long delay in recovering the value of
the investment and the associated risks of such delay, the Company sold the
technology for $100,000 in 1999.
OTHER INCOME (EXPENSE)
Other Income (Expense) aggregated $562,000, $637,000 and $400,000 in the
years 1999, 1998 and 1997, respectively. The major component of other income
(expense) is interest expense, which increased from 1997 to 1999, as the result
of increased short-term borrowing under the Company's line of credit.
PROVISION FOR FEDERAL AND STATE INCOME TAXES
The provision for federal, state and foreign income taxes (benefit)
aggregated ($200,000), ($2,145,000) and $2,364,000 for the years 1999 through
1997, respectively. The aggregate tax rate percentage was (4%), (16%) and 38%
for the same periods.
The 1999 and 1998 tax benefits were the result of a tax loss carryback to
earlier reporting periods.
At December 31, 1999, the Company has deferred tax assets recorded in its
statement of financial position of $2,194,000 that is net of a valuation reserve
of $4,599,000 on total deferred tax assets of $6,793,000. The amount of the
unreserved tax asset, $2,194,000, is based on management's determination of the
18
<PAGE> 19
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 United States dollars. There is a potential for a
foreign currency gain or loss based upon fluctuations between the United States
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.
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.
THE EURO CONVERSION
During 1998, the Company investigated the impact of the Euro conversion on
its subsidiaries in the United Kingdom and in Germany. Because Germany is a
participating country, the Company purchased accounting software in order to
accommodate the dual currency requirements for the transition period. The
purchase of that software was accounted for in accordance with the Company's
accounting policy for asset capitalization. The Company does not expect the Euro
conversion to have a material impact on its business or its financial condition.
INFLATION
The Company does not believe that inflation has had a material impact on its
operations.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company's Stock Price is Volatile
The Company's stock price, like that of other technology companies, is
subject to significant volatility because of factors such as:
- the announcement of new products, services or technological
innovations by the Company or its competitors
- quarterly variations in its operating results
- changes in revenue or earnings estimates by the investment community
- speculation in the press or investment community
- failure to meet earning expectations
In addition, the Company's stock price may be affected by general market
conditions and domestic and international economic factors unrelated to the
Company's performance. Further, until recently, the Company's stock was thinly
traded. Because of these factors, recent trends should not be considered
reliable indicators of future stock prices or financial results.
19
<PAGE> 20
The Company's Business May Suffer If It Cannot Protect its Intellectual Property
The Company generally relies upon patent, copyright, trademark and trade secret
laws and contract rights in the United States and in other countries to
establish and maintain the Company's proprietary rights in its technology and
products. However, there can be no assurance that any of the Company's
proprietary rights will not be challenged, invalidated or circumvented. In
addition, the laws of certain countries do not protect the Company's proprietary
rights to the same extent, as do the laws of the United States. Therefore, there
can be no assurance that the Company will be able to adequately protect its
proprietary technology against unauthorized third-party copying or use, which
could adversely affect the Company's competitive position. Further, there can be
no assurance that the Company will be able to obtain licenses to any technology
that it may require to conduct its business or that, if obtainable, such
technology can be licensed at a reasonable cost.
Intellectual Property Rights
The Company is aggressively pursuing the enforcement of its intellectual
property rights after an extensive patent review conducted in 1999.
Subsequently, the Company retained a major law firm to enforce these rights
against infringing parties, which management believes to be extensive. Despite
the Company's and its legal representatives' efforts, there can be no assurance
or predictability as to any amount of recovery or the length of time it will
take the Company to recover any royalties or license fees which may be
recoverable. Despite the Company's efforts to protect its intellectual property
rights, unauthorized use may still occur, particularly in foreign countries.
Development of New Products and Solutions
The Company must make continuous investment in research and development to
maintain its ongoing effort to continually improve its products and provide
innovative solutions to its customers. The development of software products is a
difficult and costly process and subject to many other products' requirements.
The Company's inability to timely deliver new products in the past has had an
adverse effect on the Company's operating and financial results. There can be no
assurance that the Company will be able to effectively develop new products in
the future.
Competition
The Company competes with many established companies in the computer storage and
server industries and certain of these companies have substantially greater
financial, marketing and technological resources, larger distribution
capabilities, earlier access to customers and more opportunity to address
customers' various information technology requirements than the Company. The
Company's business may be adversely affected by the announcement or introduction
of new products by its competitors, including hardware, software and services,
price reductions of its competitors' equipment or services and the
implementation of effective marketing strategies by its competitors.
Competitive pricing pressures exist in the computer storage and server markets
and have had and may in the future have an adverse effect on the Company's
revenues and earnings. There also has been and may continue to be a willingness
on the part of certain competitors to reduce prices in order to preserve or gain
market share, which the Company cannot foresee. The Company currently believes
that pricing pressures are likely to continue. The relative and varying rates of
product price and component cost declines could have an adverse effect on the
Company's earnings.
20
<PAGE> 21
Rapid Technological Changes
The computer industry is changing both dramatically and rapidly. The development
of "open systems computing", the introduction of the Internet, new fibre
technologies (SAN) and the increasing storage density in disk drive
technologies, have caused an increase in new product development and shorter
time to bring the new products to market. While the Company believes that its
Virtual Storage Architecture and StorageSuite products are advanced when
compared to competitive products, and compliment many other products utilized in
total customer solutions, there can be no assurance that this will continue in
the future. The failure to remain consistently ahead of competitive technologies
would have a negative impact on the Company's operating results and financial
condition.
Business Alliances
Many companies are forming business alliances with their competitors, to be able
to provide totally integrated storage solutions to their customers. One result
of these alliances is to effectively preclude competitive products from being
offered to the customers. Many of the relationships are exclusive and the
Company's failure to develop similar relationships will effectively reduce the
number of qualified sales opportunities the Company will have for its products
in the future. The Company believes that it addresses this issue by its return
to the reseller channel sales model and having the integrator/solution
providers/value added-resellers perform the solution selling required. The
Company's failure to open these sales channels will have a negative effect on
the Company's operating results and financial condition.
Operations
The Company's products operate near the limits of electronic and physical
performance and are designed and manufactured with relatively small tolerances.
If flaws in design, production, assembly or testing were to occur by the Company
or its suppliers, the Company could experience a rate of failure in its products
that would result in substantial repair or replacement costs and potential
damage to the Company's reputation. Continued improvement in manufacturing
capabilities and control of material and manufacturing quality and costs are
critical factors in the future growth of the Company. The Company frequently
revises and updates manufacturing and test processes to address engineering and
component changes to its products and evaluates the reallocation of
manufacturing resources among its facilities. There can be no assurance that the
Company's efforts to monitor, develop and implement appropriate test and
manufacturing processes for its products will be sufficient to permit the
Company to avoid a rate of failure in its products that results in substantial
delays in shipment, significant repair or replacement costs and potential damage
to the Company's reputation, any of which could have a material adverse effect
on the Company's business, results of operations or financial condition.
Additionally, most companies in the high technology arena are under pressure to
be able to acquire and retain the services of talented individuals. At present,
there is a shortage in the number of qualified employees who are available,
creating a lucrative job market for qualified and talented high tech employees.
The Company has had a decline in revenue in each of the two previous years and
comparable reduction in its work force. While the Company believes that it has
the required core personnel to effectively manage and grow the Company, there
can no assurance that key employees may leave the company in the future. The
failure to maintain key employees could adversely affect the Company's operating
and financial results in the future.
21
<PAGE> 22
Liquidity and Working Capital
The Company's continued success depends on maintaining adequate liquidity and
working capital to meet its operational requirements. Given the recent
volatility in the securities markets and, in particular, the securities of
technology companies, there can be no assurances that anticipated investors'
investments in the Company will close and that the Company will receive
additional equity financing. The failure of the Company to maintain adequate
liquidity and working capital could have a material adverse impact on the
Company.
Failure of Suppliers to Provide Quality Products
The Company purchases several sophisticated components and products from one or
a limited number of qualified suppliers. These components and products include
disk drives, high density memory components and power supplies. The Company has
experienced delivery delays from time to time because of high industry demand or
the inability of some vendors to consistently meet its quality and delivery
requirements. If any of its suppliers were to fail to meet the quality or
delivery requirements needed to satisfy customer orders for its products, the
Company could lose time-sensitive customer orders and have significantly
decreased quarterly revenues and earnings, which would have a material adverse
effect on the Company's business, results of operations or financial condition.
Additionally, the Company periodically transitions its product line to
incorporate new technologies. The importance of transitioning its customers
smoothly to new technologies, along with its historically uneven pattern of
quarterly sales, intensifies the risk that a supplier who fails to meet its
delivery or quality requirements will have an adverse impact on the Company's
revenues and earnings.
Changes in Laws, Regulations Or Other Conditions That Could Adversely Impair The
Company's Condition
The Company's business, results of operations and financial condition could be
adversely affected if any laws, regulations or standards, both foreign and
domestic, relating to the Company or its products were newly implemented or
changed.
Litigation That The Company May Become Involved In May Adversely Affect The
Company
In the ordinary course of business, the Company may become involved in
litigation, administrative proceedings and governmental proceedings. Such
matters can be time-consuming, divert management's attention and resources and
cause the Company to incur significant expenses. Furthermore, there can be no
assurance that the results of any of these actions will not have a material
adverse effect on its business, results of operations or financial condition.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The market risk inherent in the Company's financial instruments relates
primarily in fluctuations in the prime rate of interest to be charged to the
Company under the terms of the promissory note for the revolving credit
facility. The Company does not use derivative products or have any material
unhedged monetary assets, except for the inter-company balances outstanding,
which are detailed above in ITEM 7 "Foreign Currency Transactions".
22
<PAGE> 23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statement data listed in the Index to Consolidated Financial
Statement at Item 14 of this Form 10-K are incorporated by reference into this
Item 8 of Part II of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no disagreements with the Company's independent accountants
on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure or any reportable events.
23
<PAGE> 24
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
BOARD OF DIRECTORS
THEODORE J. GOODLANDER, 56, founded the Company and has been Chairman of
the Board of Directors, President and Chief Executive Officer since the
Company's inception. Mr. Goodlander served as President of Cab-Tek, Inc., a
computer accessories manufacturing company, from 1981 to 1991. From 1978 to
1981, he was 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, 57, 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.
STEVEN S. CHEN, 54, has been a director of the Company since May, 1996. Mr.
Chen is also the Chairman and Chief Executive Officer of Applitone.net. Mr. Chen
was previously the Executive Vice President and Chief Technology Officer of
Sequent Computer Systems, Inc. Prior to that, Mr. Chen was 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.
EDWARD A. GARDNER, 53, has been the President, Chief Operating Officer and
a director, of the Company, since May 8, 2000. Mr. Gardner has served as Chief
Executive Officer and a director of Hampshire Hospitality Holdings, Inc., a
company that owns and operates businesses in the hospitality and tourism
industry from 1992 to 2000. From 1983 to 1992, he has held various positions,
including president, of a national industrial gas and welding supply company.
Previously, Mr. Gardner served as controller for Fidelity Management and
Research Company and was a certified public accountant while at the accounting
firm of Deloitte and Touche (formerly Haskins and Sells). He received his
business degree from Northeastern University and a masters degree from Suffolk
University.
ROGER E. GAULD, 53, has been a director of the Company since May 8, 2000.
Mr. Gauld is also a director and Chief Financial Officer of Hampshire Holdings,
Inc. Mr. Gauld was previously co-founder and Chief Financial Officer of several
manufacturing and distribution firms. Earlier, he was founder and President of
The Phoenix Consulting Group, Inc., which specialized in financial planning and
controls, risk management, data processing, mergers and acquisitions. In
addition, he is a certified public accountant, served as an audit manager with
Ernst & Young (formerly Arthur Young) and was an officer in the U.S. Army for
four years.
OTHER EXECUTIVE OFFICERS
PETER N. HOOD, 59, has been the Company's Chief Financial Officer since May
16, 2000. Mr. Hood was previously owner and Chief Executive Officer of Phoenix
Custom Molders, Inc., a custom manufacturer of plastic parts from 1993 to 2000
and was co-founder and Vice President of Phoenix Distributors, Inc., a business
involved in consolidating independent distributors from 1985 to 1993. From 1965
to 1985, he was with the accounting firm of Ernst & Young, becoming a partner in
1976. He received his business degree from Northeastern University and is a
certified public accountant.
All directors hold office until the next annual meeting of stockholders and
until their successors are elected and qualified. All officers of the Company
are elected annually by the Board of Directors and serve at the Board's
discretion.
24
<PAGE> 25
MEETINGS OF THE BOARD OF DIRECTORS AND ITS COMMITTEES
The Board met formally twice during 1999. The Board of Directors has a
Compensation Committee, which makes recommendations concerning salaries and
incentive compensation for employees of, and consultants to, the Company. It met
twice during 1999. Its current members are Theodore J. Goodlander, Steven S.
Chen, Shigeho Inaoka, Edward A. Gardner and Roger E. Gauld. The Board also has
an Audit Committee, which reviews the results and scope of the audit and other
services provided by the Company's independent auditors. It met twice during
1999. Its current members are Roger E. Gauld (currently chairman of the Audit
Committee), Edward A. Gardner, Theodore J. Goodlander, Steven S. Chen and
Shigeho Inaoka. During 1999 Mr. Gooodlander and Mr. Inaoka attended more than
75% of the meetings of the Board and the meetings of the committees of the Board
on which they serve.
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, Chen, Gardner, and
Gauld, 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,
except for the grant of an option to Mr. Gardner to purchase 30,000 shares as
described above.
25
<PAGE> 26
ITEM 11. EXECUTIVE COMPENSATION
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 years ended on the last day of December for
1999, 1998, and 1997, respectively, by its Chief Executive Officer and each of
the Company's other executive officers whose total salary and bonus exceeded
$100,000 during such year (collectively, "the Named Executive Officers"):
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM COMPENSATION
------------------- ----------------------
AWARDS
SECURITIES
UNDERLYING
OTHER ANNUAL STOCK ALL OTHER
NAME AND FISCAL SALARY BONUS COMPENSATION OPTIONS COMPENSATION
PRINCIPAL POSITION YEAR(1) $ $ ($)(2) (#) ($)(2)
------------------ ------- ------ ----- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Theodore J. Goodlander 1999 $ 93,750 -- -- -- --
President and Chief 1998 $150,000 -- -- -- --
Executive Officer 1997 $150,000 -- -- -- --
Edward A. Gardner, 1999 $0 230,000(3)
President and Chief 1998 $0
Operating Officer 1997 $0
(as of May 8, 2000)
Peter N. Hood 1999 $0 30,000(4)
Chief Financial Officer 1998 $0
(as of May 8, 2000) 1997 $0
James C. Louney 1999 $ 3,750 -- -- -- --
Chief Financial Officer 1998 $ 90,000 -- -- -- --
and Treasurer 1997 $ 60,007(5) -- -- 80,000(5) --
Keith C. Perry 1999 $125,000 --
Senior Vice President Sales 1998 $ 50,000(6) 75,000(6)
And Worldwide Marketing 1997 $0 --
James P. Nolan 1999 $0 -- -- 0 --
Senior Vice President 1998 $ 49,701 -- -- -- --
Research and Development 1997 $ 46,763(7) 75,000(7)
</TABLE>
----------
(1) The Company's fiscal year ends 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, 1999.
26
<PAGE> 27
(3) As of May 8, 2000, Mr. Gardner was granted options to purchase 230,000
shares of the Company's Common Stock at $6.625 per share.
(4) As of May 8, 2000, Mr. Hood was granted options to purchase 30,000 shares of
the Company's Common Stock at $6.625 per share.
(5) Mr. Louney joined the Company on May 1, 1997, amount shown reflects
compensation for partial year. Mr. Louney resigned for personal reasons on
January 12, 1999 and amounts shown reflect compensation for the partial year
in 1999 and includes 75,000 options at $5.00 per share.
(6) Mr. Perry joined the Company in September 1998 and resigned in October 1999.
The amounts shown reflects compensation for the partial years 1998 and 1999.
(7) Mr. Nolan joined the Company on September 1, 1997, amount shown reflects
compensation for partial years in 1997 and 1998 as he resigned in April,
1998.
The following table sets forth certain information concerning exercisable
and unexercisable stock options held by the Named Executive Officers as of
December 31, 1999:
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED IN-THE-MONEY
UNEXERCISED OPTIONS AT YEAR-END(1) OPTIONS AT YEAR-END(2)
---------------------------------- ---------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Theodore J. 0 0 0 0
Goodlander
Keith Perry(3) 0 0 0 0
</TABLE>
----------
(1) No options were exercised during the year ended December 31, 1999 by the
Named Executive Officers.
(2) Based on the difference between closing price of the underlying shares of
Common Stock on December 31, 1999 as reported by the American Stock
Exchange ($6.25) and the option exercise price.
(3) Mr. Perry resigned from the Company in October 1999, did not exercise any
options and did not retain any unexercised options.
27
<PAGE> 28
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNER AND MANAGEMENT
PRINCIPAL AND MANAGEMENT STOCKHOLDERS
The following table sets forth certain information as of May 22, 2000 with
respect to the voting securities of the Company owned by (1) any person
(including any "group" as that term is defined in section 13(d)(3) of the
Securities Exchange Act of 1934) who is known to the Company to be the
beneficial owner of more than 5% of the outstanding shares of a class of voting
securities of the Company, (2) each director or nominee for director of the
Company, (3) each of the executive officers named in the Summary Compensation
Table elsewhere herein, and (4) all directors and executive officers of the
Company as a group. In accordance with Rule 13d-3 under the Securities Exchange
Act of 1934, a person is deemed to be the beneficial owner, for purposes of this
table, of any voting securities of the Company if he or she has or shares voting
power or investment power with respect to such securities or has the right to
acquire beneficial ownership thereof at any time within 60 days of May 22, 2000.
As used herein "voting power" is the power to vote or direct the voting of
shares, and "investment power" is the power to dispose of or direct the
disposition of shares. Except as indicated in the notes following the table
below, each person named has sole voting and investment power with respect to
the shares listed as being beneficially owned by such person.
28
<PAGE> 29
SHARES OF COMMON STOCK
BENEFICIALLY OWNED
-----------------------------
DIRECTORS, OFFICERS AND 5% STOCKHOLDERS NUMBER PERCENT
--------------------------------------- ------ -------
Theodore J. Goodlander
c/o Storage Computer Corporation 4,000,000(1) 33.36%
11 Riverside Street
Nashua, New Hampshire 03062
Theodore Jay Goodlander II Trust 822,500 6.86%
Paige Boer, Trustee
c/o Storage Computer Corporation
11 Riverside Street
Nashua, New Hampshire 03062
Christine Marian Goodlander Trust 822,500 6.86%
Jeanne McCready, Trustee
c/o Storage Computer Corporation
11 Riverside Street
Nashua, New Hampshire 03062
Margaret Vivian Goodlander Trust 822,500 6.86%
Jeanne McCready, Trustee
c/o Storage Computer Corporation
11 Riverside Street
Nashua, New Hampshire 03062
John Samuel Goodlander Trust 822,500 6.86%
Jeanne McCready, Trustee
c/o Storage Computer Corporation
11 Riverside Street
Nashua, New Hampshire 03062
Shigeho Inaoka 586,100(2)
2-16-7 Iwataminani 4.89%
Komae-shi
Tokyo, Japan 182
Steven S. Chen 30,000(3) *
c/o Storage Computer Corporation
11 Riverside Street
Nashua, New Hampshire 03062
Edward A. Gardner 230,000(4) 1.92%
c/o Storage Computer Corporation
11 Riverside Street
Nashua, New Hampshire 03062
Peter N. Hood 30,000(5) *
c/o Storage Computer Corporation
11 Riverside Street
Nashua, NH 03062
Roger E. Gauld 30,000(6) *
c/o Storage Computer Corporation
11 Riverside Street
Nashua, New Hampshire 03062
All directors and executive officers as a 4,876,100(7) 40.67%
group(7)
----------
29
<PAGE> 30
* less than 1%
(1) Does not include 3,290,000 shares of Common Stock held by the Goodlander
children's trusts 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) Includes 212,000 shares of Common Stock held by TechnoGraphy, Inc. for
which Mr. Inaoka is an executive officer and in which he owns a controlling
interest. Includes 30,000 shares of Common Stock issuable upon exercise of
options granted under the Company's Amended and Restated Stock Incentive
Plan and 132,500 shares issued upon the conversion of warrants sold to Mr.
Inaoka . Does not include 30,000 shares held by family members.
(3) Includes 30,000 shares of Common Stock issuable upon the exercise of
options granted under the Company's Amended and Restated Stock Incentive
Plan.
(4) Includes 230,000 options pursuant to the Company's Amended and Restated
Stock Incentive Plan.
(5) Includes 30,000 options pursuant to the Company's Amended and Restated
Stock Incentive Plan.
(6) Includes 30,000 options pursuant to the Company's Amended and Restated
Stock Incentive Plan.
(7) See footnotes (1)-(6) above.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires directors,
executive officers and persons who own more than 10% of the outstanding Common
Stock of the Company to file with the Securities and Exchange Commission ("SEC")
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 review of the 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 satisfied.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Kristiania Corp.
SCC currently leases, as a tenant-at-will under a triple-net lease, a
35,000 sq. ft. facility which is occupied by its light manufacturing, research
and development and office operations in Nashua, New Hampshire. The lease is
with an affiliated entity owned by Mr. Goodlander. The Company paid annual
rentals of $195,600, $200,400 and $224,800 in 1997, 1998 and 1999, respectively.
30
<PAGE> 31
Related Party Debt
Since the inception of the Company, Mr. Goodlander has made cash loans to
the Company. The aggregate amount owing to Mr. Goodlander under this note, at
the end of fiscal years 1997, 1998 and 1999 was $710,000, $710,000 and $810,000,
respectively. The debt is unsecured, and $710,000 bears interest at prime plus
1% and $100,000 bears interest a 6% and is convertible into the Company's common
stock at $4.00 per share. This debt is subordinated to the bank demand line of
credit.
During 1999, Mr. Inaoka, who is a member of the Company's board of directors
and president of TechnoGraphy, Inc., one of the Company's major customers, made
a loan to the Company for $250,000. The loan earned interest at 6% and was
convertible into the Company's common stock at $1.88 per share. Interest
amounted to $4,033 as of December 31, 1999 and was later converted into shares
of the common stock of the Company subsequent to December 31, 1999.
31
<PAGE> 32
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES 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 auditors are filed as part of this report:
(1) Index to Financial Statements
Report of Independent Auditors Consolidated Financial Position
Statement of Consolidated Operations
Statement of Consolidated Stockholders' Equity
Statement of Consolidated Cash Flows
Notes to Consolidated 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).
3.3 Certificate of Designation establishing Series A 8% Convertible Preferred
Stock, with Certificate of Correction.
*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 Restated and Amended Stock Incentive Plan. (Incorporated by reference as
Exhibit 4.1 to the Company's Form S-8, Registration No. 333-31297, as
filed on July 14, 1997).
32
<PAGE> 33
*10.2 Form of Restated and Amended Stock Incentive Plan, Stock Award
(Incorporated by reference As Exhibit 4.2 to the Company's Form S-8,
Registration No. 333-31297, as filed on July 14, 1997).
*10.3 Promissory Note in the principal amount of $710,000 dated December 6,
1997 made payable to Theodore J. Goodlander.
*10.4 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).
*10.5 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).
*10.5b 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, 1997, to the Revolving Credit Agreement dated
August 6, 1996 between the Company and State Street Bank and Trust
Company (Incorporated by reference to Exhibit 10.6 to the Company's 1998
Form 10-K, as filed on April 16, 1999).
*10.7 $10,000,000 Line of Credit Note from Registrant to State Street Bank and
Trust Company dated August 20, 1997 (Incorporated by reference to Exhibit
10.7 to the Company's 1998 Form 10-K, as filed on April 16, 1999).
*10.8 Loan Agreement dated August 6, 1996 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).
10.9 Third Amendment to the Second Amended and Restated Loan Agreement dated
October 1999 between the Company and State Street Bank.
10.10 Fourth Amended and Restated Line of Credit Note dated October 1999
between the Company and State Street Bank.
*21 Subsidiaries of the Company (Incorporated by reference to Exhibit 21 to
the Company's 1998 Form 10-K, as filed on April 16, 1999).
23.1 Consent of BDO Seidman, LLP.
23.2 Consent of Richard A. Eisner & Company, LLP.
27 Financial Data Schedule.
99 "Safe Harbor" Statement under Private Securities Litigation Reform Act of
1996.
---------------
* previously filed
(b) Reports on Form 8-K
None.
33
<PAGE> 34
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 31st day of May, 2000.
STORAGE COMPUTER CORPORATION
BY: /s/ Theodore J. Goodlander
------------------------------------
Theodore J. Goodlander
Chairman of the Board of Directors, CEO
(Principal Executive Officer)
34
<PAGE> 35
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in their capacities and on the date indicated.
Signature Capacity Date
--------- -------- ----
/s/ Theodore J. Goodlander Chairman of the Board of Directors May 31, 2000
--------------------------- CEO (Principal Executive Officer)
Theodore J. Goodlander
/s/ Edward A. Gardner President, Chief Operating Officer May 31, 2000
--------------------------- and Director
Edward A. Gardner
/s/ Peter N. Hood Vice President, Finance (Chief May 31, 2000
--------------------------- Financial and Accounting Officer)
Peter N. Hood
/s/ Roger E. Gauld Director May 31, 2000
---------------------------
Roger E. Gauld
/s/ Shigeho Inaoka Director May 31, 2000
---------------------------
Shigeho Inaoka
/s/ Steven S. Chen Director May 31, 2000
---------------------------
Steven S. Chen
<PAGE> 36
STORAGE COMPUTER CORPORATION
- I N D E X -
Page
Number
------
Reports of Independent Auditors 37
Consolidated Financial Position at
December 31, 1999 and December 31, 1998 39
Statement of Consolidated Operations
for the Years Ended December 31, 1999,
December 31, 1998 and December 31, 1997 40
Statement of Consolidated Stockholders
Equity for the Years Ended December 31,
1999, December 31, 1998 and December 31, 1997 41
Statement of Consolidated Cash Flows
for the Years Ended December 31, 1999,
December 31, 1998 and December 31, 1997 42
Notes to Consolidated Financial Statements. . . . . . 36
36
<PAGE> 37
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors
Storage Computer Corporation
Nashua, New Hampshire 03062
We have audited the accompanying statements of consolidated financial
position of Storage Computer Corporation and subsidiaries, as at December 31,
1999 and 1998, and the related statements of consolidated operations,
stockholders equity, and cash flows for the years then ended. 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, at December 31, 1999 and 1998, and the
consolidated results of their operations and their consolidated cash flows for
the years then ended in conformity with generally accepted accounting
principles.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
Boston, Massachusetts
March 17, 2000,
except for Note E and Note N, which are as of April 14, 2000.
37
<PAGE> 38
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors
Storage Computer Corporation
Nashua, New Hampshire 03062
We have audited the accompanying consolidated statements of operations,
stockholders equity and cash flows of Storage Computer Corporation and
subsidiaries, for the year ended December 31, 1997. 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated results of their operations and their
consolidated cash flows of Storage Computer Corporation and subsidiaries for the
year ended December 31, 1997 in conformity with generally accepted accounting
principles.
/s/ Richard A. Eisner & Company, LLP
Richard A. Eisner & Company, LLP
New York, New York
February 25, 1998
38
<PAGE> 39
STORAGE COMPUTER CORPORATION
CONSOLIDATED FINANCIAL POSITION
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1999 1998
----------- -----------
A S S E T S (NOTE E)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,182,194 $ 925,259
Accounts receivable
(net of allowance for doubtful
accounts) (Note L) 751,077 5,187,351
Income tax refund receivable 2,160,211
Inventories (Note B) 6,795,477 8,263,040
Other current assets 852,774 707,300
----------- -----------
Total current assets 9,581,522 17,243,161
----------- -----------
Property and equipment (Note C) 1,842,733 2,742,252
Deferred tax asset (Note I) 2,194,000 2,194,000
Other assets (Note D) 610,413 720,489
----------- -----------
Total $14,228,668 $22,899,902
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable (Note E) $6,640,445 $ 9,336,377
Accounts payable 257,440 2,298,655
Accrued expenses 1,194,654 1,122,685
Accrued taxes 238,466 164,600
Deferred revenue 705,124 921,947
---------- -----------
Total current liabilities 9,036,129 13,844,264
---------- -----------
Long-term debt (Note E) 1,175,899 710,000
---------- -----------
Commitments and contingencies (Notes F, G and J)
Stockholders' equity (Notes E, H and N):
Preferred stock, par value $.001;
Authorized 1,000,000 shares; none
Issued and outstanding
Common stock par value $.001;
Authorized 25,000,000 shares;
issued and outstanding 11,434,863
shares (1999) and 11,347,823 shares (1998) 11,435 11,348
Additional paid-in capital 13,968,263 13,721,021
Accumulated deficit (9,963,058) (5,386,731)
------------ ------------
Total stockholders' equity 4,016,640 8,345,638
------------ ------------
Total $ 14,228,668 $ 22,899,902
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
39
<PAGE> 40
STORAGE COMPUTER CORPORATION
STATEMENT OF CONSOLIDATED OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Revenue $ 10,525,658 $ 17,051,749 $ 37,146,103
Product cost 6,303,125 11,838,657 18,152,978
------------ ------------ ------------
Gross margin 4,222,533 5,213,092 18,993,125
------------ ------------ ------------
Operating expenses:
Research and development 1,980,988 4,258,249 2,851,739
Selling and marketing 4,098,347 8,871,805 7,959,521
General and administrative 2,357,254 2,387,748 1,526,477
Write down of investment (Note D) 0 2,094,134 0
------------ ------------ ------------
Total Operating Expenses 8,436,589 17,611,936 12,337,737
------------ ------------ ------------
Operating income (loss) (4,214,056) (12,398,844) 6,655,388
------------ ------------ ------------
Other income (expense):
Interest expense, net (Note E) (840,253) (647,557) (438,649)
Other income (Note D) 278,114 10,889 39,014
------------ ------------ ------------
Total (562,139) (636,668) (399,635)
------------ ------------ ------------
Income (loss) before income taxes
(benefit) (4,776,195) (13,035,512) 6,255,753
------------ ------------ ------------
Provision for income taxes (benefit)
(Note I):
Current tax (benefit) (199,868) (2,145,020) 2,020,000
Deferred tax -- -- 344,000
------------ ------------ ------------
Total (199,868) (2,145,020) 2,364,000
------------ ------------ ------------
Net income (loss) $ (4,576,327) $(10,890,492) $ 3,891,753
============ ============ ============
Net income (loss) per basic share $ (.40) $ (0.97) $ .36
============ ============ ============
Net income (loss) per diluted share $ (.40) $ (0.97) $ 0.33
============ ============ ============
Basic shares 11,376,082 11,254,557 10,825,043
============ ============ ============
Diluted shares 11,376,082 11,254,557 11,960,546
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
40
<PAGE> 41
STORAGE COMPUTER CORPORATION
STATEMENT OF CONSOLIDATED STOCKHOLDERS EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED
---------------------- ---------- ----------
PAR PAID-IN EARNINGS
--- ------- --------
SHARES VALUE CAPITAL (DEFICIT)
---------- ------- ----------- -----------
<S> <C> <C> <C> <C>
Balance - December 31, 1996 10,701,341 $10,701 $12,290,245 $ 1,612,008
Exercise of stock options 447,675 448 655,163
Tax benefit from stock options (Note K) 439,832
Net income
3,891,753
---------- ------- ----------- ------------
Balance - December 31, 1997 11,149,016 11,149 13,385,240 5,503,761
Exercise of stock options 174,800 175 141,980
Stock issued to 401(k) plan (Note K) 24,007 24 73,801
Tax benefit from stock options (Note K) 120,000
Net loss (10,890,492)
---------- ------- ----------- ------------
Balance - December 31, 1998 11,347,823 11,348 13,721,021 (5,386,731)
Warrants issued in connection with 111,387
bank financing (Note E)
Exercise of stock options 50,000 50 76,950
Stock issued to 401(k) plan (Note K) 37,040 37 58,905
Net loss (4,576,327)
---------- ------- ----------- ------------
Balance - December 31, 1999 11,434,863 $11,435 $13,968,263 $ (9,963,058)
========== ======= =========== ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
41
<PAGE> 42
STORAGE COMPUTER CORPORATION
STATEMENT OF CONSOLIDATED CASH FLOWS
(NOTE K)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1999 1998 1997
----------- ------------ -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $(4,576,327) $(10,890,492) $ 3,891,753
Reconciliation to operating cash flows:
Depreciation and amortization 488,883 620,552 382,836
Warrants issued for services 111,387
Stock issued to 401(k) plan 58,942 73,825
Write down of investment 2,094,134
Foreign currency transaction loss 29,423
Deferred tax provision 344,000
Changes in operating assets and liabilities:
Accounts receivable 4,436,274 8,722,650 (4,885,160)
Income tax refund receivable 2,151,677 (2,160,211)
Inventories 1,942,850 (383,556) (1,605,241)
Other assets (26,864) (152,496) (451,008)
Accounts payable and accrued expenses (1,996,304) (138,570) (536,998)
----------- ------------ -----------
Net cash provided (used) in operating
activities 2,590,518 (2,214,164) (2,830,395)
----------- ------------ -----------
Cash flows from investing activities:
Capital expenditures (4,882) (842,030) (1,823,608)
Other assets (175,113) (2,583,960)
----------- ------------ -----------
Net cash used in investing activities (4,882) (1,017,143) (4,407,568)
----------- ------------ -----------
Cash flows from financing activities:
Net proceeds from (payments on) credit line (2,695,932) 2,870,706 5,866,280
Reduction of other long-term liabilities 350,000 22,970
Net proceeds from issuance of common stock 77,000 142,155 655,611
----------- ------------ -----------
Net cash provided (used) in financing
activities (2,268,932) 3,035,831 6,521,891
----------- ------------ -----------
Effect of exchange rate changes on cash (59,769) 7,356 (23,311)
----------- ------------ -----------
Net increase (decrease) in cash and cash equivalents 256,935 (188,120) (739,383)
Cash and cash equivalents - beginning of year 925,259 1,113,379 1,852,762
----------- ------------ -----------
Cash and cash equivalents - end of year $ 1,182,194 $ 925,259 $ 1,113,379
----------- ------------ -----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
42
<PAGE> 43
STORAGE COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of the Company
and its wholly-owned and majority owned subsidiaries, Storage Computer Europe
Gmbh, Vermont Research Products, Inc., Storage Computer UK Ltd., and Open
Storage Solutions, S.A. The percentage ownership of Open Storage Solutions
increased from 20% to 51% in 1998. All significant intercompany accounts and
transactions have been eliminated. The Company also has 20% ownership of Storage
Computer (Asia) Ltd. which is accounted for by the equity method.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts in the financial statements and
accompanying notes. Actual results could differ from those estimates.
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.
Inventories
Inventories are stated at the lower of average cost (first-in, first-out
method) or market.
Property and Equipment
Property and equipment are stated at cost. Depreciation of property and
equipment is computed utilizing the same accelerated methods for both financial
and tax reporting over a period not to exceed 5 years.
Fair Value of Financial Instruments
The carrying amounts of cash, accounts receivable, other current assets,
accounts payable and accrued expenses approximate fair value because of the
short maturity of those instruments. Financial liabilities with carrying values
that approximate fair value include accounts payable, other accrued expenses,
and short term and long term debt.
Revenue Recognition
The Company recognizes revenue from product sales at the time of shipment.
Service revenue, which is not material in relation to total revenue, is
recognized over the contracted period or as the services are provided.
Research and Development
Research and development costs are expensed as incurred.
43
<PAGE> 44
Foreign Currency Translations
The functional currency for the Company's foreign operations is the U.S.
dollar. The translation from the applicable foreign currencies to U.S. dollars
is performed for balance sheet accounts using current exchange rates in effect
at the balance sheet date and for revenue and expense accounts using a weighted
average exchange rate during the period. The resulting translation adjustments
and gains or losses resulting from foreign currency transactions are included in
the Company's statement of operations.
Income Taxes
The Company follows Statement of Financial Accounting Standards No. 109
("SFAS 109") Accounting for Income Taxes. Under the asset and liability method
of SFAS 109, deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases.
Earnings (Loss) per Share
The Company calculates earnings or loss per share in accordance with
Financial Accounting Standard No. 128 ("SFAS 128"), "Earnings per Share". Basic
earnings per share is determined utilizing only the weighted average of
outstanding common shares. The effect of potentially dilutive options, warrants
and convertible securities is included in the calculation of diluted earnings
per share. There is no difference in the numerator between the basic and diluted
calculation and the only difference in the denominator is the effect of dilutive
stock options, warrants and convertible securities.
Stock-Based Compensation
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 123, ("SFAS 123"), Accounting for Stock Based
Compensation which requires disclosure of pro forma effects as if SFAS 123 had
been adopted. The Company has adopted the disclosure only requirements of SFAS
123 and accounts for its employee stock option plans under Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees.
Recent Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133. SFAS No. 133 requires companies to
recognize all derivative contracts at their fair value as either assets or
liabilities on the balance sheet. If certain conditions are met a derivative may
be specifically designated as a hedge, the objective of which is to match the
timing of gain or loss recognition on the hedging derivative with the
recognition of (1) the changes in the fair value of the hedged asset or
liability that are attributable to the hedged risk or (2) the earnings effect of
the hedged forecasted transaction. For a derivative not designated as a hedging
instrument, the gain or loss is recognized in income in the period of change.
This statement is effective for all fiscal quarters of fiscal years beginning
after June 15, 2000.
Historically, the Company has not entered into derivative contracts either
to hedge existing risks or for speculative purposes. Accordingly, the Company
does not expect the adoption of the new standard to affect its financial
statements.
NOTE B - INVENTORIES
At December 31, 1999 and 1998 inventories consisted of raw materials of
$2,170,518 and $2,306,290; work in process of $1,729,396 and $2,065,647, and
finished goods of $2,895,563 and $3,891,103.
44
<PAGE> 45
NOTE C - PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1999 1998
---------- ----------
<S> <C> <C>
Machinery and equipment $2,523,511 $2,165,279
Office furniture and fixtures 465,462 463,298
Research and development equipment 1,281,341 2,091,344
Other property 189,212 150,241
---------- ----------
Total 4,459,526 4,870,162
Less accumulated depreciation 2,616,793 2,127,910
---------- ----------
Net property and equipment $1,842,733 $2,742,252
========== ==========
</TABLE>
NOTE D - OTHER ASSETS
In August 1998, the Company and another organization formed a limited
liability company named HVVR, LLC (HVVR). The purpose of HVVR was to hold
ownership of a new product technology developed by a former customer of the
Company. The Company's investment in HVVR amounted to approximately $2,300,000.
Neither HVVR nor the Company had available the resources to pursue the
research, production, and marketing of the product. In view of the potential for
a long delay in recovering the Company's investment in HVVR through royalty
payments and the associated risks of that delay, the Company decided to write
its investment down to $100,000 at December 31, 1998. During 1999, the Company
sold its share in the net assets of HVVR for $100,000.
Other assets also includes long-term receivables from an affiliate and
customer for a five-year software license.
NOTE E - BORROWING ARRANGEMENTS
At December 31, 1999 the Company had a demand bank line of credit with
maximum borrowings of $6,900,000 secured by all assets of the Company. In
connection with an amendment to the note in 1999, the Company issued a warrant
to purchase 25,000 shares of the Company's common stock to the bank at an
exercise price of $3.00 per share to expire October 25, 2009. The warrants were
valued using the Black Scholes option-pricing model. The resulting value of
$111,387 was accounted for as additional interest on the debt. The loan
agreement provides for interest at the banks prime rate plus .25%. The agreement
contains certain covenants including, but not limited to, restrictions related
to net worth and certain financial ratios. At December 31, 1999 the remaining
balance available under the credit facility was approximately $312,000.
At December 31, 1999, the Company was in violation of certain covenants of
the bank line of credit. In April 2000 the Company reached agreement with the
bank on new terms extending the Company's line of credit until May 5, 2000 and
waiving violation of all covenants through that date. The Company intends to
reduce its bank borrowings with proceeds of an equity financing to be
consummated in 2000 (Note N).
Long term debt in the amount of $250,000 at December 31, 1999 is payable to
the president of one of the Company's major customers who is also a member of
the Board of Directors. The note bears interest at 6% and is convertible into
the Company's common stock at $1.88 per share. Interest amounted to $4,033 at
December 31, 1999. This debt was converted into shares of common stock of the
Company subsequent to December 31, 1999.
Long-term debt in the amount of $810,000 and $710,000 at December 31, 1999
and 1998 is payable to an officer and stockholder of the Company. The debt is
unsecured, and $710,000 bears interest at prime plus 1%, and $100,000 bears
interest at 6% and is convertible into the Company's common stock at $4.00 per
share. The debt is subordinated to the demand line of credit. Interest expense
related to the obligation amounted to $68,632, $67,450, and $66,100 for 1999,
1998 and 1997. This debt is due subsequent to December 31, 2000.
The balance of long term debt represents accounts payable not due until
after December 31, 2000.
45
<PAGE> 46
NOTE F - RELATED PARTY TRANSACTIONS
The Company leases plant and office facilities from an affiliated entity as
a tenant-at-will, under a triple-net operating lease agreement. Rent expense
under this lease for 1999, 1998 and 1997 amounted to $224,800, $200,400 and
$195,600, respectively.
The president of one of the Company's major customers is a member of the
board of directors of the Company (see Note M).
NOTE G - COMMITMENTS
The Company leases certain property and equipment under noncancellable
leases which expire at various dates through 2003. Future minimum lease payments
are $179,012, $135,920, $2,388 and $2,189 for the years 2000 through 2003,
respectively.
Amounts charged to operations for operating leases were $232,000, $275,000
and $286,000, for the years ended December 31, 1999, 1998 and 1997,
respectively.
NOTE H - STOCK OPTION PLANS
The Company's 1994 and 1999 Stock Incentive Plans provide for the granting
of options to purchase up to 3,500,000 shares of common stock. Option activity
during 1999, 1998 and 1997 is summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF OPTION PRICE
SHARES PER SHARE
---------- ------------
<S> <C> <C>
Balance - December 31,1996 1,663,500 $ 3.41
Granted 814,500 6.36
Exercised (447,675) 1.46
Canceled (201,425) 10.50
---------- ------
Balance - December 31, 1997 1,828,900 6.47
Granted 1,038,150 2.23
Exercised (174,800) .79
Canceled (1,219,850) 4.51
---------- ------
Balance - December 31, 1998 1,472,400 $ 1.64
Granted 1,576,650 1.22
Exercised (50,000) 1.54
Canceled (1,209,800) 1.30
---------- ------
Balance - December 31, 1999 1,789,250 1.51
---------- ------
</TABLE>
Options granted generally vest over a period not to exceed four years.
Options for 704,149 shares are exercisable at December 31, 1999 at exercise
prices ranging from $.88 to $3.60 and a weighted average price of approximately
$1.73 per share, with a weighted average remaining contractual life of
approximately nine years. At December 31, 1999, options to purchase 803,275
shares were available for grant under the plan.
On August 25, 1998 the Company extended an offer to option holders to
reprice their options. Almost all of the option holders opted to reprice their
options pursuant to the offer.
46
<PAGE> 47
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 1999, 1998 or 1997. 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, pro forma net income (loss) would have been ($6,431,002) in
1999, ($11,003,981) in 1998, and $3,539,297 in 1997. Proforma net income (loss)
per diluted share would have been ($.57) in 1999, ($.98) in 1998, and $.30 in
1997.
The fair value of the Company's stock options used to compute pro forma net
income and net income per diluted share disclosures is the estimated present
value at grant date using the Black-Scholes option-pricing model with the
following weighted average assumptions for 1997 through 1999: dividend yield of
0%; expected volatility of 80%; a risk free interest rate ranging from 4.58% to
6.11%, and an expected holding period of six years.
All options outstanding at December 31, 1999 are categorized by the ranges
shown in the table below:
WEIGHTED
AVERAGE
WEIGHTED REMAINING NUMBER
AVERAGE EXERCISE CONTRACTUAL OF
RANGE PRICE PER SHARE LIFE IN YEARS SHARES
----- ---------------- ------------- ---------
$ .88 - 1.75 $ 1.16 8.80 1,321,900
2.50 - 2.94 2.50 8.67 464,850
3.60 3.60 4.94 2,500
---------
1,789,250
---------
All options exercisable at December 31, 1999 are categorized by the ranges
shown in the table below:
WEIGHTED
AVERAGE
WEIGHTED REMAINING
AVERAGE EXERCISE CONTRACTUAL NUMBER OF
RANGE PRICE PER SHARE LIFE IN YEARS SHARES
----- ---------------- ------------- ---------
$ .88 - 1.25 $ 1.13 9.64 398,150
2.50 - 2.56 2.50 8.67 303,499
3.60 3.60 4.94 2,500
-------
704,149
-------
47
<PAGE> 48
NOTE I - INCOME TAXES
At December 31, 1999 and December 31, 1998, the Company has net deferred
tax assets as follows:
DECEMBER 31,
-------------------------
1999 1998
---------- ----------
Accounts receivable reserve $ 201,000 $ 66,000
Inventory costs 204,000 186,000
Reserve on other assets 102,000 102,000
Write down of investment 0 712,000
Deferred revenue 196,000 257,000
Accrued expenses 543,000 2,000
General business tax credits 523,000 508,000
Domestic operating loss carryover 3,204,000 2,098,000
Foreign operating loss carryover 1,820,000 1,238,000
----------- -----------
Total deferred tax assets 6,793,000 5,169,000
Valuation allowance (4,599,000) (2,975,000)
----------- -----------
Net deferred tax assets, noncurrent $ 2,194,000 $ 2,194,000
=========== ===========
The domestic operating loss carryovers, amounting to approximately
$9,400,000 expire at various dates through 2019 and the foreign operating loss
carryovers amounting to approximately $5,300,000 can be carried forward
indefinitely. The Company is subject to Internal Revenue Code provisions which
limit the domestic net operating loss carryovers available annually. The general
business tax credits expire at various dates through 2019.
The United States, foreign, and state components of the tax provision (benefit)
are as follows:
DECEMBER 31,
-------------------------------------
1999 1998 1997
--------- ----------- ----------
Current:
United States, net of
business tax credits of $197,000
In 1997. $(199,868) $(2,150,020) $1,580,000
Foreign 0 0 0
State 0 5,000 440,000
--------- ----------- ----------
(199,868) $(2,145,020) 2,020,000
--------- ----------- ----------
Deferred:
United States 0 0 180,000
Foreign 0 0 164,000
--------- ----------- ----------
0 0 344,000
--------- ----------- ----------
Provision (benefit) for income taxes $(199,868) $(2,145,020) $2,364,000
--------- ----------- ----------
The tax benefit of $199,868 included in the accompanying statement of operations
for 1999 represents tax refunds received in 1999 in excess of amounts estimated
at December 31, 1998.
At December 31, 1999, the Company's foreign entities have accumulated deficits.
The Company intends its investments in these entities to be permanent.
48
<PAGE> 49
The following table reconciles the provision for taxes with the expected income
tax obligation obtained by applying the United States federal statutory rate to
pretax income.
<TABLE>
<CAPTION>
1999 1998 1997
----------- ------------ ----------
<S> <C> <C> <C>
Income (loss) before income taxes $(4,776,195) $(13,035,512) $6,255,753
----------- ------------ ----------
Expected tax (benefit) at statutory rate of 34% (1,624,000) (4,432,000) 2,127,000
Adjustments due to:
Difference between foreign rate and U.S.
statutory rate 196,000 40,000
State taxes, net of federal benefit 5,000 291,000
Increase (decrease) in valuation reserve 1,624,000 2,075,000 5,000
Adjustment of prior year tax refunds (199,868)
Tax credits (130,000)
Other 10,980 31,000
----------- ------------ ----------
Provision (benefit) for income taxes $ (199,868) $ (2,145,020) $2,364,000
=========== ============ ==========
</TABLE>
Of the above income or (loss) before income taxes, approximately ($4,200,000),
($10,500,000) and $5,900,000 was due to domestic operations and the balance due
through foreign operations in 1999, 1998 and 1997, respectively.
NOTE J - LEGAL PROCEEDINGS
The Company is involved in several non-material judicial proceedings as a
result of its ordinary course of business. The Company believes that any outcome
as a result of its involvement in these proceedings will not have a material
effect on its operating results or financial condition.
NOTE K - SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments for interest for the years 1999, 1998 and 1997 were $836,000,
$580,000, and $486,000. For the same periods cash payments for income taxes were
$0, $200,000, and $718,000. In 1998 and 1997 the Company reduced federal taxes
payable and increased additional paid-in capital by $120,000 and $439,832,
respectively for the tax benefits associated with the exercise of stock options.
In 1999 and 1998, the Company contributed 37,040 and 24,007 shares of its common
stock valued at $58,942 and $73,825 to its 401(k) plan.
NOTE L - ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company established an allowance for doubtful accounts for the first
time in 1998 resulting in an allowance at December 31, 1998 of which $583,623
was charged to expense during the year. The allowance at December 31, 1999 was
$607,599.
49
<PAGE> 50
NOTE M - BUSINESS SEGMENT INFORMATION
The Company's operations are conducted in one business segment: the design,
manufacture and sale of high-performance scalable data storage. Operations by
geographic area are summarized as follows:
<TABLE>
<CAPTION>
UNITED
STATES EUROPE ELIMINATIONS CONSOLIDATED
----------- ----------- ------------ ------------
<S> <C> <C> <C>
1999:
Domestic sales $ 4,541,522 $ 3,384,013 $ 7,925,535
Export sales 2,460,664 63,281 2,523,945
Export sales to affiliates 1,360,418 (1,284,240) 76,178
----------- ----------- ------------ -----------
Total revenue $ 8,362,604 $ 3,447,294 $ (1,284,240) $10,525,658
----------- ----------- ------------ -----------
Long-lived assets $12,730,889 $ 116,089 $(10,743,832) $ 2,103,146
1998:
Domestic sales $ 9,222,124 $ 2,704,186 $11,926,310
Export sales 4,308,526 490,098 4,798,624
Export sales to affiliates 909,402 706 (583,293) 326,815
----------- ----------- ------------ -----------
Total revenue $14,440,052 $ 3,194,990 $ (583,293) $17,051,749
----------- ----------- ------------ -----------
Long-lived assets $13,920,700 $ 244,768 $(10,702,727) $ 3,462,741
1997:
Domestic sales $18,598,928 $ 7,825,213 $26,424,141
Export sales 9,078,719 9,078,719
Export sales to affiliates 1,643,243 1,643,243
----------- ----------- ------------ -----------
Total revenue $29,320,890 $ 7,825,213 $37,146,103
----------- ----------- ------------ -----------
Long-lived assets $14,606,309 $ 372,132 $ (7,974,157) $ 7,004,284
----------- ----------- ------------ -----------
</TABLE>
Export sales from the United States are summarized as follows:
1999 1998 1997
---------- ---------- -----------
Far East $2,331,076 $3,810,000 $ 8,631,000
Europe 1,442,336 1,059,000 1,855,000
Other 47,670 349,000 236,000
---------- ---------- -----------
$3,821,082 $5,218,000 $10,722,000
---------- ---------- -----------
For the years ended December 31, 1999, December 31, 1998 and December 31,
1997 sales to one customer were in excess of 10% of revenues and amounted to
$2,246,000, $3,430,000 and, $7,009,000, respectively (See Note F).
50
<PAGE> 51
NOTE N - SUBSEQUENT EVENT
Subsequent to December 31, 1999, the Company received offers from several
investors to purchase $7,000,000 of convertible preferred stock of the Company,
of which $1,000,000 was to be received from an executive officer of the Company.
The Company also received a commitment letter from its bank to extend the due
date of up to $3,550,000 of the balance due under its line of credit to January
2001.
51
